A Brief Explanation of the Credit Union System

According to the Wall Street Journal, Reuters, and the AP, federal regulators took control over two corporate credit unions Friday night. U.S. Central Federal Credit Union and Western Corporate Credit Union are two of 28 corporate credit unions that provide wholesale financing for American credit unions. Here is a basic overview of the credit union industry and how it operates.

There are two types of credit unions:

• Natural Person Credit Unions which provide financial services for individual people
• Corporate Credit Unions which provide services to natural person credit unions

Each of these credit unions can be federally chartered or state-charter, just like commercial banks. Federal credit unions must use the National Credit Union Administration (NCUA) as their regulator and insurer, much like the FDIC regulates and insures commercial banks. State-charter credit unions can choose NCUA for insurance or used a private company such as American Share Insurance (ASI).

Natural Person Credit Unions are cooperative lending institutions organized around a particular group of individuals with a common bond (e.g. employees or a company, or residents or a community). They offer a wide range of financial services, which makes them indistinguishable from commercial banks with one exception: credit unions are non-for-profit institutions. They return their profits in the form of a dividend to the members of the credit union rather than reinvest the profits like commercial banks.

Corporate Credit Unions are much like the twelve Federal Reserve district banks. Each is a private non-for-profit institution that is owned by natural person credit unions. These corporate credit unions provide low-cost financing services and competitive investment and lending rates to their members, just like the Federal Reserve System. They are, in fact, credit unions for credit unions.

U.S. Central Federal Credit Union is a corporate credit union for corporate credit unions. They provide liquidity and investment services, as well as risk-management, to its member credit unions. It has been deeply affected by the depressed value of mortgage-linked securities, and accepted $1-billion in capital from the NCUA earlier this year. Today’s move is designed to protect natural person credit unions and the interests of National Credit Union Share Insurance Fund (the FDIC of credit unions).

Is My Credit Union Safe?

As an industry, natural person credit unions are well capitalized at an industry average of about 10-percent. This is higher than the commercial banking industry average. From the press release about today’s action, the NCUA said of natural person credit unions:

Credit unions that serve consumers remain very strong, with net worth exceeding 10 percent of assets, healthy growth in assets, membership, and loan portfolios despite the difficult economy.

While the financial condition of credit unions will vary from institution to institution, there have been far fewer problems with natural person credit unions during the recent banking crisis than has been the case with commercial banks.

Here are other articles I have written on this topic:

• The Future of Corporate Credit Unions
• How Your Credit Union is Helping Fix the Credit Crisis
• ACU in Black for Second Year
• Previewing the Illinois Credit Union League Convention
• Beige Book’s Midwestern Summary
• Argonne Credit Union Annual Meeting
• Argonne Credit Union Board Passes Merger Resolution
• Credit Union Board of Advisors
• Network Upfront Ends; Prices Down
• Three Ideas To Position Yourself for the Recovery