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.
