While the reasons for the financial crisis are complex, the outcome is not in question. Banks have collapsed under the weight of too many loan defaults which brought attention to the many poor lending practices of the industry.
Credit unions however, have remained largely unhurt by the financial crisis. Credit unions have proven themselves to be safer than other financial institutions due to their smaller size, structure and ownership status. As non-profits, credit unions are less likely to make decisions that could harm their members. The 2008 first quarter Credit Union Report shows that while other lenders were failing, credit unions were continually lending and their mortgages were growing faster than any other loans.
According to Dan Mica, the President and CEO of the Credit Union National Association (CUNA), funds held in credit union accounts are as safe as those deposits in the Federal Deposit Insurance Corporation (FDIC) insured banks.
Credit Union Strategies
Credit unions originated few, if any, subprime mortgage loans. This is due to the fact that credit unions tend to place a higher priority on member needs than making a profit. If a member was unable to afford a home loan there would be a higher probability s/he would default on that loan. Thus, this default would not only hurt the individual member, it would end up hurting all other members of the credit union as well.
Along with safe lending practices, the large amount of mortgages that are held in a credit union portfolio, around 70 percent, is a major reason that credit unions were able to remain above the subprime mortgage meltdown. Since credit unions retain their mortgage portfolios, they are more careful to lend only to individuals who can repay the loans, as opposed to financial institutions that sell mortgages on the secondary market.
Together, these strategies have created a culture that has prevented credit unions from engaging in risky lending practices.
Credit Union Credit Quality
In general, credit unions handle their mortgage portfolios responsibly. The Credit Union Association of New York says despite the economic downturn, credit unions are stable and safe, mainly because unlike banks, they are not-for-profits owned by their members.
Credit unions are more conservatively managed than other financial institutions; they return earnings back to their members instead of generated profits for outside investors. Therefore, credit unions do not have the same incentive to take risks, enabling them to avoid the subprime meltdown.
According to recent Wall Street Journal article, in 2008, American banks cut back on lending, while loans by American credit unions rose 7 percent to more than $575 billion, an amount up by $35 billion compared to the previous year.
Final Word
The success of credit unions has created a contrast against the failure of larger institutions. From this contrast, new techniques have been formed to reduce the risk that lend to the financial crisis. These include such areas as:
Improving banking operations to ensure safety and soundness.
Improving customer service and one-on-one contact with the institution.
Improving staff incentives structures to promote honesty and fair dealings.
Financial institutions are now reevaluating their internal cultures and re-training all levels of their staff to make better lending choices and become more focused on their customers needs rather than just a bottom line.