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Ecology of Banking: Credit Unions, Banks & Thrifts

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For all intents and purposes to the consumer, there is little difference among thrifts, commercial banks, and credit unions. The financial services they all offer will be similar and you probably don’t even know if the financial institution you’re banking with is a thrift or commercial bank (Washington Mutual is technically a savings and loan and the largest one). In fact, the only real notable difference between thrifts/banks & credit unions has to deal with depository insurance. Thrifts and commercial banks are covered by FDIC, credit unions are covered by NCUA, though both are covered to the same limit of $100,000 per person per financial institution.

Now, for the academics and trivia buffs out there, here’s a little more on their differences.

Thrifts

Thrift SignThrifts, probably better known as savings and loan institutions (mostly because of the S&L crisis in the 1980s and 90s when 747 banks failed), originated as institutions that deal only with savings accounts and mortgage loans (hence savings & loans). Nowadays, they’ve broadened their financial offerings such that the only differences are in business dealings. By law, thrifts may lend up to 20% of their assets to commercial loans and only half of that can be used on small business loans. Also, in order to obtain advances from the Federal Home Loan Bank, thrifts must meet a ‘qualified thrift lender test.’ That test requires that 65% of its assets must be in mortgage and consumer-related assets. In plain English, they’re just restricted to keeping most of their lending in the mortgage and consumer arenas.

By the way, IndyMac Bank was a thrift bank and the largest at the time it failed (it was also the second largest bank failure ever, second to Continental Illinois Bank in 1984)

Credit Unions

Fire Police City County Federal Credit UnionA credit union is cooperative bank that is privately owned and controlled by its members, the account holders. The purpose of the cooperative is to provide credit and financial services at reasonable rates and that’s why you’ll often find better loan rates at credit unions. Another requirement of credit unions is that there must be a restriction on who can join based on its “field of membership.”

What’s also interesting about credit unions is that each depositor is given a vote in the board of director elections and each member is considered an “owner” of the credit union. The elected board of directors is charged with the responsibility of setting policies governing interest rates and other services.

Other than that, the only other major difference is in vocabulary. A savings account is called a share account, a checking account is called a share draft account, and certificates of deposit are known as share term certificates. The “share” is a reminder that everyone is an owner in the union.

Lastly, deposits are insured by the National Credit Union Administration up to $100,000.

Commercial Banks

Fire Police City County Federal Credit UnionA commercial bank is “everything else.” The term is really just a way to distinguish a bank as most consumers recognize it (savings and checking accounts, ATMs, etc.) from an investment bank, like a Merill Lynch or a Lehman. As I mentioned before, the deposit insurance that governs your assets at these banks is the FDIC and that covers you up to $100,000 (there are certain ways to extend that limit).

Those are the basic differences from a layman’s perspective, there are actually far more differences when you get into the specifics (here’s an intriguing Economic Letter out of the Federal Reserve Bank of San Francisco detailing some differences between bank charters and thrift charters). I skipped over those because they weren’t as interesting and didn’t really have much bearing on how consumers are affected.

(Photos: Thrift sign by zieak, BofA ATM by neubie, and Credit Union by Consumerist)

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12 Responses to “Ecology of Banking: Credit Unions, Banks & Thrifts”

  1. Rick Morley says:

    As far as I understand, I huge difference between a credit union and a bank is that credit unions are considered tax-exempt organizations. Thus they don’t have to pay taxes. This is one reason credit unions can often give better rates than the banks down the street. They have less overhead, since they don’t have to pay taxes.

    • D Heffelfinger says:

      Apparently you aren’t familiar with how a credit union operates ? Credit unions have small paid staffs, many volunteers, and no investors to pay off. I don’t think taxes make the big difference !!!!

  2. Brenda says:

    Good information some of the information we did not know and was very informative. e.g. thrifts — never quite understood the difference.

  3. Jennifer O says:

    One last thing..the deposit insurance on NCUA and FDIC for institutions changed from 100,000 to 250,000 this past year.

    • jim says:

      That’s right, good catch. One thing to be wary of is that it’s only until December 2010, after which it’ll revert unless they make it permanent…

  4. Billy Martin says:

    I am a member of a credit union but I have no voting privileges. Am I suppose to in Texas?

  5. Robert says:

    The differance between a share account versus a savings or checking deposit is not only vocabulary. Shares can be offset to reduce or prevent loss if the owner defaults on an obligation with the credit union. A financial institution must have a court ruling to contest for deposits.

  6. Barry says:

    There is a huge difference between Credit Unions and Commercial Banks…that being taxes. Credit Unions pay NO TAXES. Commercial Banks are like any other business and required to pay their fair share of taxes, which frankly can be sizeable. This creates an uneven playing field when it comes to products and services that can be provided.

    There may be some smaller Credit Unions that have small paid staffs and many volunteers…but those are dwindling. Credit Unions certainly serve their purpose when they serve their “membership areas”. But when they begin to define their “membership areas” to include areas that have no real connection to their original charter, then they have overstepped their bounds and should be held to the same standards as Commercial Banks and required to pay TAXES.

  7. Mark says:

    It sounds as if Barry has an axe to grind with Credit Unions. Which bank are you employed by Barry?
    This pissing match has been going on for years between the banks and the CU’s. But it really only matters to educated consumers; the banks want people to “believe” they offer a better service, and the Credit Union appeals to an educated consumer. All anyone needs to do is perform the unbiased research to understand the advantages and disadvantages of both institutions.
    I personally will only do busines with Credit Unions. Especially after the recent mess the banks have gotten themselves into.

  8. Anonymous says:

    there is big difference between thrift and commercail bank

  9. Raeb22 says:

    I opened a savings account with a local credit union.
    I only need this for a short time until I get a checking acct. They charged
    me $5.00.


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