Credit Unions are built to protect their members

Given the recent events in the financial industry, there are several outspoken individuals taking the position that traditional banking is a giant scam. I wanted to take this opportunity to explain how a traditional credit union operates.

Credit unions (CU) take in deposits (shares). Deposits are called shares because CUs are member-owned. A CU will typically pay interest (dividends) on these shares. Utilizing the deposits, a CU will then grant loans to its members at a higher rate than its dividend rate. This creates a spread/margin. This margin allows a CU to operate and grow. A CU can also invest the funds. A typical CU will do both - lend and invest.

Federally chartered CUs are regulated by the NCUA. State chartered CUs are typically regulated by their state. Federally insured CUs are insured by NCUA. Private insurance is permissible in a few states.

Regulatory authorities conduct exams of CUs under their authority. Exam cycles are typically 18 months or less. However, offsite reviews of every CU are conducted quarterly based on the publicly available financial data submitted to the NCUA. All CUs under NCUA’s authority (whether insurance or regulatory) submit quarterly Call Reports, which again, are publicly available. Everyone can go to NCUA’s website and look up the financials of any CU required to submit these reports. Incredible transparency.

These financial reports produce ratios, which are again publicly available. Any negative trends are identified quickly by examiners. All CUs are required, per regulation, to retain certain levels of Net Worth (capitalization). If Net Worth gets too low, authorities act. If liquidity gets too low, authorities act. If a CU overextends itself, authorities act. If losses get too high, authorities act. If anything looks like a threat, authorities act.

Additionally, all CUs are required to obtain audits (or some other sort of review depending on asset size). Required audit/review dates are codified in regulation and regularly reviewed by examiners.

Issues like insolvency do occasionally happen in the CU industry. I ran across this when I was an examiner. I discovered an embezzlement scheme that ultimately made the CU insolvent with negative net worth. No CU member lost any of their deposits. Given the constant oversight by several outside parties, insolvency is extremely rare, but does occasionally happen.

CU’s can create businesses called a Credit Union Service Organization (CUSO) or contract out services to vendors – both are done all the time. Due diligence requirements exist for CUs to follow when selecting a vendor. Due diligence and contracts are closely scrutinized by regulatory authorities.

And as many of you know – that’s a very high-level summary of CU operations.

With that being said, do some traditional financial institutions operate unethically? Sure. 
Is there room for innovation and improvement? Absolutely.
Is the industry a scam? Far from it.