Day after day there are reports of mounting losses in the commercial banking industry. Banks are losing money in mortgage lending, auto loans and their credit card portfolio. Many of the major banks have been deemed to be virtually insolvent and need capital infusions to stay afloat. With banks in such dire straits, why aren’t credit unions in trouble as well?
Credit unions are not for profit cooperatives that exist to serve the needs of their members. This is why credit unions typically offer higher rates on savings accounts and lower rates on loan products. Commercial banks are much more profit driven than credit unions. Banks lend solely to maximize revenue. This apetite for increasing revenue means that commercial banks will take on greater risk to increase profit margin.
Credit unions are very conservative in their lending practices. I think that this is because credit unions hold onto the bulk of the loans that they make until maturity. They do not bundle their loans and sell them off into secondary markets like banks. If you are going to make a loan and hold it on your books for the life of the loan; then you are only going to make loans to individuals that you believe can repay you. You are only going to lend when prudent. Credit unions have historically had lower delinquency rates on loans than commercial banks because they are less likely to lend to individuals with bad credit. Since credit unions have less assets than commercial banks; they cannot afford to write as many bad loans as banks do. This tells me that credit unions do a better job at evaluating and managing risk than banks.
As careful as most credit unions are in their financial management; corporate credit unions have not been as responsible. Credit unions have access to short term capital through corporate credit unions. Corporate credit unions are central credit unions that provide liquidity to member credit unions. Corporate credit unions own about 64 billion in mortgage/asset backed securities. Corporate credit unions have been burned by an 18 billion dollar decline in the value of these securities. The federal government has helped with 1 billion dollar in capital but this is not enough to deal with the expected losses. It appears to be only a matter of time before corporate credit unions ask for access to the Troubled Assets Relief Program(TARP).
While credit unions are struggling to deal with the impact of the housing crisis, the expected losses of under 70 billion dollars pale in comparison to the trillions of dollars that are expected to be lost in the commercial banking industry.
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