Wednesday, November 23, 2011

Banks vs. Credit Unions in the Financial Crisis - with Graphs


In recent discussions of the relative merits of using banks or credit unions, one argument in favor of the latter asserts that they generally fared better than banks in the financial crisis. The reason for this, the argument goes, is that for-profit bank shareholders are only liable for losses up to the value of their investment, while they stand to profit from the returns on both their own investment as well as the depositors' funds. Thus, since it's rational to take greater risks when gambling with other peoples' money than with your own, for-profit banks tended to take on risky investments during the real estate bubble.

By contrast, since they are owned by their members, the conflict of interest between shareholders' desire for greater returns and depositors' desire for increased stability simply doesn't exist in credit unions. They thus tended to take fewer risks during the boom, and, as a result, didn't take as grave of a hit as commercial banks when the economy went bust.

In order to see if this thesis reflected the actual experience of the financial crisis, I crunched some numbers from the NCUA and FDIC. The results, which were published yesterday by the Motley Fool, seem to confirm credit unions' relatively superior performance in the bust. Read the full article, complete with pretty graphs, here.

5 comments:

  1. These findings are somewhat close to those I made last year in my blog (see http://americancu.blogspot.com/2011/02/crisis-of-2008-betting-bank-did-we-also.html).

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    1. i love this post sir. it really helped me out in my dissertation. Good information provide by this blog.

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  2. Thanks for sharing, Keldon; that's a great piece, and it's always good to cross paths with a fellow credit union nerd. Is your blog still active - if so, I'll link you :)

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    1. i love this post dear. it really nice. Good information provide by this blog.

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  3. I honestly prefer a credit union over big banks. For me, a credit union is a lot easier to deal with compared to banks and the folks at Oak Trust in Plainfield, Illinois just make the experience even better. Check out their website at www.oaktrust.com

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