Comment: There are Big Differences Between Credit Unions and Banks

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There are Big Differences Between Credit Unions and Banks

Henry, I agree with your comments about the fundamental operation of federal credit unions verses commercial banks. As you wrote, they both:

1. Participate in fractional reserve banking
2. Are required to hold reserves by law

Now, please consider these facts about federal credit unions:

(for details, see: http://www.frbsf.org/education/activities/drecon/2005/0503.html and http://www.ncua.gov/DataApps/Pages/SI-FAQs.aspx)

1. They are "not for profit" meaning excess revenue beyond expenses is paid back to the membership in the form of owners’ dividends or goes back into the cooperative.

2. They are owned by the membership not individual or institutional investors, so there is no outside pressure (e.g., "Wall Street") to maintain high earnings.

3. They are not regulated by the Federal Reserve. They are regulated by the NCUA (National Credit Union Administration).

4. They do not make loans to non-members.

5. They are self-insured through the NCUSIF (National Credit Union Share Insurance Fund) not the FDIC (Federal Depositors Insurance Fund). In 2011, 26 credit unions were closed or put in receivership by the NCUA (see: http://www.ncua.gov/Legal/Regs/Pages/Closed2011.aspx ). All assets were covered by the NCUSIF. Conversely, 91 commercial or savings banks closed in 2011 (see: http://www.fdic.gov/bank/individual/failed/banklist.html ).

6. Credit unions generally borrow short-term funds (less than 1 year) from the CLF (Central Liquidity Facility) of the NCUA. They can only borrow money for liquidity purposes and must be collateralized using the assets of the cooperative. They cannot establish a line of credit.

7. Credit unions compete against commercial banks for depositors’ money and as such offer a market based alternative to the for-profit banks that have failed the country.

As you can see from the above, the differences are significant and in my opinion outweigh depositing money in a commercial bank account verses a credit union.