The FDIC Crisis: Credit Unions Versus Banks
March 2023 seemed to be the month of bank collapses. In early March, two U.S. banks, Silicon Valley Bank and Signature Bank, caved in. Later that same month, Switzerland’s second-largest bank, Credit Suisse, collapsed. In April, First Republic Bank become the latest bank to fail.
What happened with the US-based banks and what does this mean for people like you and me? We take a brief look at how these banks went under. We also learn about credit unions and how they differ from banks.
Banks are businesses. They can be either privately owned or publicly traded, meaning that they have stockholders who own a portion of the company. A bank provides a financial service to people and makes money for their customers and themselves.
The primary purpose of a bank is to keep people’s money safe and grow it through a variety of different financial products. Gone are the days of tucking wads of cash under a mattress or stacks of paper money in a home safe. While some people may still use these methods, a bank has been accepted as the place to store your funds.
A bank accepts monetary deposits from people and places them in a checking, savings, or money market account. Your money can grow while it is stored at a bank through interest or other financial products. Banks also loan money to customers to aid in the purchase of a home, car, or business. They put their deposits to work by loaning them out and earning interest on it.
So, if a bank has access to these funds, what causes a bank to collapse? There can be many reasons including:
● Liabilities outpace assets: This means that the bank cannot pay its obligations to the people who deposited money with them or to businesses that have loaned money to them.
● Risky investments: Banks use the funds deposited with them to invest in bonds and other products to grow the money entrusted to them. Sometimes these investments go bad or don’t perform well.
● Run on the bank: People panic if they think the bank is failing and start to withdraw their money from the bank all at once. This depletes a bank’s cash reserves and causes it to default.
The two recent bank failures of Silicon Valley Bank (SVB) and Signature Bank reflect a few of these reasons, and both experienced a run on the bank. The collapse of SVB was the second-largest bank failure in U.S. financial history at $210 billion in assets. Signature Bank was the third-largest bank failure at $110 billion in assets.
Some depositors have wondered if credit unions are safer than traditional banks.
Credit Unions versus Banks
What is the difference between a credit union and a bank? While they also serve their depositors and provide a place to safely store and grow funds, credit unions differ from banks in a few ways.
These differences include:
● Ownership: While a bank is owned privately or publicly by shareholders, a credit union is owned by its members. Normally, credit union members have a trait that they share, such as a specific workplace or industry, military service member affiliation, geographic area or community, or even a particular religious denomination.
● Non-profit status: A bank is a for-profit business but credit unions are not. They are non-profits that are not beholden to shareholders or committed to achieving a certain bottom line. Because they have non-profit status, credit unions do not pay federal taxes. They can also receive subsidies from the community or organization with which they are affiliated.
● Lower fees: Many times, credit unions do not charge a monthly fee or maintenance on the accounts they service.
● Better rates: Because they are more focused on serving members rather than making a profit, credit unions often offer better rates. They pay higher interest rates on deposit accounts, like checking and savings. Plus, they offer lower rates on loans for autos, homes, and other things for which people need to borrow money.
While they do offer some advantages, credit unions also have some disadvantages. They are smaller than banks, so they do not have the wide range of financial products and services that banks offer. Since they may be representing a particular community, credit unions also don’t have as many branches and participating ATMs. And while some credit unions utilize mobile banking and apps, they may not be as developed or convenient as banking apps.
One important question about credit unions: Are they insured by the Federal Deposit Insurance Corporation (FDIC)?
FDIC versus NCUA
The FDIC provides depositors with insurance for their funds deposited at participating banks. This includes $250,000 coverage for certain accounts, such as checking, savings, money market accounts, and certificates of deposit. If the bank were to go under, depositors would receive up to $250,000 from the federal government.
Credit union accounts are not guaranteed by the FDIC. However, they are regulated by a similar federal agency called the National Credit Union Administration (NCUA). Created in 1970, NCUA covers deposits at participating credit unions for $250,000 through the National Credit Union Share Insurance Fund (NCUSIF).
Similar to FDIC coverage, NCUSIF offers coverage for different buckets or types of accounts. These buckets include:
● Single accounts with checking, savings, money market, and CDs.
● Joint accounts with no beneficiaries for checking, savings, money market, and CDs.
● Retirement accounts, such as traditional and Roth IRAs and Keogh plans.
● Revocable trusts with $250,000 coverage for each beneficiary.
● Irrevocable trusts with $250,000 total coverage.
While the recent collapse of two large banks may be concerning, the U.S. financial system has depositors covered by federally backed agencies. The FDIC guarantees deposits at participating banks, and the NCUA guarantees deposits at participating credit unions. With some research and consultation with a financial advisor, you can confidently choose the option that best meets your needs.