Tell me about credit unions and their boards
March 11, 2023 8:22 AM Subscribe
Spurred by the recent collapse of Silicon Valley Bank, I was interested in learning more about my bank. It's a credit union, which I understand has different policies than typical banks. I also looked at who was on the board - and few people on the board actually appear to work in finance or have that background. I have questions.
I'm curious about the differences between typical banks, credit unions and coops. I have googled this, but what is presented is pretty high level. Maybe the answer is high level, but if there are more intrinsic differences, or unique things to know either from articles or people's experiences I'd like to hear it. I'm also interested in bank boards - more specifically smaller banks, coops and credit unions. I was surprised that the board of my bank (elected by the credit union members) doesn't appear to have a strong background in finance. This seems concerning - is it concerning?
Anything else that is useful to know about credit unions?
I'm curious about the differences between typical banks, credit unions and coops. I have googled this, but what is presented is pretty high level. Maybe the answer is high level, but if there are more intrinsic differences, or unique things to know either from articles or people's experiences I'd like to hear it. I'm also interested in bank boards - more specifically smaller banks, coops and credit unions. I was surprised that the board of my bank (elected by the credit union members) doesn't appear to have a strong background in finance. This seems concerning - is it concerning?
Anything else that is useful to know about credit unions?
My work is heavily related to corporate boards, but not credit unions specifically. That caveat aside, you want a board that is able to advise the CEO broadly, and that doesn't necessarily mean coming from the same exact industry as the company itself.
The National Credit Union Administration backs this up. Their guidelines on identifying qualified board members doesn't call for banking experience, but for financial knowledge:
Basic Financial Skills Required
The board of directors of a federal credit union is charged with the general direction and control of the institution. Credit unions, however, are not like many other commercial entities in that they do not produce observable physical goods or services. Instead, credit unions receive deposits from the membership and, in turn, lend or invest these funds. The key measure of the credit union’s success or failure is its financial statements. As such, a director must understand these financial statements to participate in a meaningful manner in the direction and control of the institution.
Accordingly, to be an effective director, an individual must have a certain base level of financial skills, consistent with the size and complexity of the credit union operation they serve. At a minimum, directors must have the ability to read and understand the credit union’s balance sheet and income statement. If directors do not have the requisite skills when elected or appointed, they must obtain these skills in a timely manner, as discussed below.
What a Director Should Know
At a minimum, a director should be able to examine the credit union’s balance sheet, income statement and be able to answer the following questions:
What does this line item mean?
Why is it important to the credit union?
Is the value of the line item changing over time? If so, what does that change (either positive or negative) mean?
Is the change important to the credit union?
A director must understand the specific activities in which his or her credit union engages. In particular, a director must understand not only how these activities generate revenue for the credit union but
posted by NotMyselfRightNow at 10:48 AM on March 11, 2023 [1 favorite]
The National Credit Union Administration backs this up. Their guidelines on identifying qualified board members doesn't call for banking experience, but for financial knowledge:
Basic Financial Skills Required
The board of directors of a federal credit union is charged with the general direction and control of the institution. Credit unions, however, are not like many other commercial entities in that they do not produce observable physical goods or services. Instead, credit unions receive deposits from the membership and, in turn, lend or invest these funds. The key measure of the credit union’s success or failure is its financial statements. As such, a director must understand these financial statements to participate in a meaningful manner in the direction and control of the institution.
Accordingly, to be an effective director, an individual must have a certain base level of financial skills, consistent with the size and complexity of the credit union operation they serve. At a minimum, directors must have the ability to read and understand the credit union’s balance sheet and income statement. If directors do not have the requisite skills when elected or appointed, they must obtain these skills in a timely manner, as discussed below.
What a Director Should Know
At a minimum, a director should be able to examine the credit union’s balance sheet, income statement and be able to answer the following questions:
What does this line item mean?
Why is it important to the credit union?
Is the value of the line item changing over time? If so, what does that change (either positive or negative) mean?
Is the change important to the credit union?
A director must understand the specific activities in which his or her credit union engages. In particular, a director must understand not only how these activities generate revenue for the credit union but
posted by NotMyselfRightNow at 10:48 AM on March 11, 2023 [1 favorite]
A credit union is essentially a coop, where the institution is owned by the account holders. The account holders elect the board, who hires the executives, who hire the rank-and-file employees. That’s why credit unions usually refer to accounts as “shares”, and why you usually have a separate account from primary checking and savings with a nominal minimum balance. That account is your ownership share.
In practice, there’s not much difference between a credit union and a regular bank. There’s a credit union where I live (actually, the first credit union in the US) that brands itself as a bank instead of a credit union, and you’d never know the difference unless you looked into the governance model.
Credit unions used to limit membership - employees of the same company, stuff like that - but those have liberalized. My old credit Union in Ohio was just “any resident of Franklin County”, and my current one has even fewer restrictions.
posted by kevinbelt at 10:50 AM on March 11, 2023
In practice, there’s not much difference between a credit union and a regular bank. There’s a credit union where I live (actually, the first credit union in the US) that brands itself as a bank instead of a credit union, and you’d never know the difference unless you looked into the governance model.
Credit unions used to limit membership - employees of the same company, stuff like that - but those have liberalized. My old credit Union in Ohio was just “any resident of Franklin County”, and my current one has even fewer restrictions.
posted by kevinbelt at 10:50 AM on March 11, 2023
Credit unions are owned by the members (account holders) and vote for the board. The credit union is run and managed by the board for the benefits of it's members. So credit unions tend to have no fees, better rates, better customer service, and none of the shenanigans that for-profit banks pull on their customers.
I belong to the local firefighter's credit union and I love it. I think it used to be firefighters-only but now it's anyone who lives in their region. Their mission is oriented towards giving kids scholarships and supporting firefighter related charities, so any profits they make are used for that. I would never use a commercial bank for my day to day bank.
posted by bradbane at 11:35 AM on March 11, 2023
I belong to the local firefighter's credit union and I love it. I think it used to be firefighters-only but now it's anyone who lives in their region. Their mission is oriented towards giving kids scholarships and supporting firefighter related charities, so any profits they make are used for that. I would never use a commercial bank for my day to day bank.
posted by bradbane at 11:35 AM on March 11, 2023
Banks vs Credit Unions
There are two major structural differences between banks and credit unions: 1. credit unions are not-for-profit while banks are for-profit and 2. credit unions are member-owned and governed cooperatives while banks are either privately owned or publicly traded companies.
Those two differences mean that credit unions have much, much less incentive to price gouge or scam you than banks. That doesn't mean every credit union service will be better/cheaper than every bank service, but it does mean that overall, you'll probably have a better experience at a credit union than at a bank, especially if you're not rich.
In terms of credit unions vs coops -- credit unions are a subset of the cooperative movement and are coops, just a specific, regulated form of coop.
If you want to read way more about the history and details of the credit union movement, check out Democratizing Finance.
Board Details:
The NCUA (federal credit union regulator) has a ton of resources on credit union boards if you want to do a deep dive: https://ncua.gov/support-services/credit-union-resources-expansion/learning
Credit unions are indeed cooperatives that are owned and governed by their members, so everyone on the board must be a member of the credit union (so the credit union can't just go out and ask local grandees or experts to join the board). The level of finance experience your board needs depends a lot on how big your credit union is and what services it provides. A $2 million church credit union likely isn't doing anything that complex and anyone with basic numeracy and interest in learning could understand their finances, whereas a $10 billion employer credit union may well need people with professional-level finance experience on the board if it's doing stuff like issuing subordinated debt.
If your credit union is also a CDFI (about 10% of credit unions are), the board composition also has to demonstrate accountability to the community the credit union serves by having people from local non-profits and/or who are from/representative of underserved segments of your community (sorry to be vague, the specific requirements an institution has to meet are context-dependent). These people are not meant to be finance experts, though some may be, and instead play an important role helping the credit union better meet the actual financial services needs of your community.
Finally, the board isn't the only source of financial oversight. Credit unions also have volunteer-staffed credit committees (to review lending decisions), supervisory committees (to respond to member complaints and ensure the credit union is following proper procedures), ALCO committees (oversees asset-liability management, e.g., what failed at Silicon Valley Bank), and are examined annually by their regulator for safety and soundness as well as compliance with consumer protection laws. The committees often have folks with a lot of technical expertise on them.
posted by snaw at 5:05 AM on March 12, 2023 [3 favorites]
There are two major structural differences between banks and credit unions: 1. credit unions are not-for-profit while banks are for-profit and 2. credit unions are member-owned and governed cooperatives while banks are either privately owned or publicly traded companies.
Those two differences mean that credit unions have much, much less incentive to price gouge or scam you than banks. That doesn't mean every credit union service will be better/cheaper than every bank service, but it does mean that overall, you'll probably have a better experience at a credit union than at a bank, especially if you're not rich.
In terms of credit unions vs coops -- credit unions are a subset of the cooperative movement and are coops, just a specific, regulated form of coop.
If you want to read way more about the history and details of the credit union movement, check out Democratizing Finance.
Board Details:
The NCUA (federal credit union regulator) has a ton of resources on credit union boards if you want to do a deep dive: https://ncua.gov/support-services/credit-union-resources-expansion/learning
Credit unions are indeed cooperatives that are owned and governed by their members, so everyone on the board must be a member of the credit union (so the credit union can't just go out and ask local grandees or experts to join the board). The level of finance experience your board needs depends a lot on how big your credit union is and what services it provides. A $2 million church credit union likely isn't doing anything that complex and anyone with basic numeracy and interest in learning could understand their finances, whereas a $10 billion employer credit union may well need people with professional-level finance experience on the board if it's doing stuff like issuing subordinated debt.
If your credit union is also a CDFI (about 10% of credit unions are), the board composition also has to demonstrate accountability to the community the credit union serves by having people from local non-profits and/or who are from/representative of underserved segments of your community (sorry to be vague, the specific requirements an institution has to meet are context-dependent). These people are not meant to be finance experts, though some may be, and instead play an important role helping the credit union better meet the actual financial services needs of your community.
Finally, the board isn't the only source of financial oversight. Credit unions also have volunteer-staffed credit committees (to review lending decisions), supervisory committees (to respond to member complaints and ensure the credit union is following proper procedures), ALCO committees (oversees asset-liability management, e.g., what failed at Silicon Valley Bank), and are examined annually by their regulator for safety and soundness as well as compliance with consumer protection laws. The committees often have folks with a lot of technical expertise on them.
posted by snaw at 5:05 AM on March 12, 2023 [3 favorites]
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That said, it is not customary for everyone on the board of a financial institution to have a financial background (or "X" background for any value of "X" corresponding to the company's area of focus). Big companies will have college presidents, active and retired CEOs in other industries (often major customer industries), and permanently or temporarily retired grandees of politics and public service. Small companies (like credit unions) will have the local version of the same.
posted by MattD at 9:10 AM on March 11, 2023