The differences between credit unions and banks
In perspective, there is a low failure rate at both kinds of institutions. However, a benefit of credit unions is that they tend to avoid taking on riskier investments.
“Credit unions still manage complex balance sheets like banks do. Thus, if a particular asset class declines in value, both banks and credit unions may be impacted, according to Vossmeyer. “But in general, credit unions are more risk averse. ”.
Prior to the financial crisis of 2007–2008, over 23% of mortgages at commercial banks were subprime loans, which carry a higher risk of default because they are typically extended to individuals with poor credit and come with higher interest rates. Comparatively speaking, only about 4% of mortgages at credit unions were subprime.
Vossmeyer stated, “Therefore, you can see very different risk profiles in terms of the asset side.”
According to Luigi Zingales, a finance professor at the University of Chicago Booth School of Business, banks may take greater risks with their lending or investments in an effort to maximize their return on equity.
“Now that you typically make much less money at a credit union, you don’t have a lot of incentive to take that much risk because you don’t profit very much,” Zingales stated.
He noted that if a credit union does fail, it might be due to incompetent management or theft — there are cases in which employees have absconded with the institution’s cash.
Could a Silicon Valley Bank-style meltdown happen at a credit union?
Following Silicon Valley Bank’s failure earlier this year due to a run that forced it to sell its long-term securities at a loss, bank failures dominated the news. Signature in New York soon followed.
Here’s what happened: As the Federal Reserve raised interest rates, older bonds lost value because newer bonds paid out higher rates, pummeling the investments these banks had made. Fearing for SVB’s viability as investment losses mounted, depositors panicked and withdrew their funds. To let people cash out, SVB needed to sell its long-term bonds. But why would potential buyers pay for these low-yielding bonds when newer bonds offer more attractive rates? That’s why SVB had to unload those assets at a discount.
SVB was vulnerable to depositor flight because companies and well-heeled savers kept millions of dollars in their accounts with the bank, exceeding the Federal Deposit Insurance Corp.’s coverage limit of $250,000. Because of this cap, 94% of SVB deposits were uninsured. Fear spread quickly.
“Depositors at Silicon Valley Bank have an incentive to flee when they notice problems and realize that the majority of their deposits are not insured, which triggers the liquidation process,” Vossmeyer stated. However, if you’re a credit union member, there’s really no reason to run ”.
Deposits at federally insured credit unions are also guaranteed up to $250,000, but the National Credit Union Share Insurance Fund provides the coverage. Because these institutions cater to individuals and households with smaller accounts, Vossmeyer said, 90% of deposits at credit unions end up being insured.
The National Credit Union Administration made an effort to reassure the public about the stability of its institutions shortly after SVB collapsed.
“The credit union system remains well-capitalized and on a solid footing,” NCUA Chairman Todd Harper wrote in a press release. “The National Credit Union Administration continues to monitor credit union performance through both the examination process and offsite monitoring, and it will continue to do so into the future.”
One of your main concerns when looking for a financial institution should be confirming that the bank or credit union is insured, according to Vossmeyer.
And if you’re considering taking on a mortgage or a new credit card, Zingales said, credit unions tend to offer more generous terms than banks. Mortgages might come with better rates, credit card fees might be lower and many offer free checking accounts without a minimum balance.
FAQ
Are credit unions safe if banks crash?
Yes. In an emergency, credit unions are typically more secure than banks. This is so because, unlike banks, credit unions serve small businesses and individuals rather than big investors, thereby utilizing fewer risks.
How safe is your money in a credit union?
Credit unions are federally insured, just like banks are; however, the Federal Deposit Insurance Corporation (FDIC) does not insure credit unions. Rather, credit unions are federally insured by the National Credit Union Administration (NCUA), which makes them equally secure to conventional banks.
Are credit unions safer than banks during recession?
Although both can be severely impacted by difficult economic times, credit unions had a statistically lower failure rate during the Great Recession. However, whichever option you choose, you shouldn’t be concerned about losing money. Banks and credit unions are generally safe places to keep your money because they both have deposit insurance.
Are any credit unions in financial trouble?
In 2022, seven conservatorships or liquidations occurred at National Credit Union Administration (NCUA) credit unions; thus far in 2023, two have occurred.
Read More :
https://www.1edcu.org/are-credit-unions-safer-than-banks-in-a-collapse/