Are Credit Unions Regulated?

Credit unions offer an alternative means of handling personal finances for individuals who qualify for membership. Although credit unions differ from banks, they do share several similarities. One important similarity between banks and credit unions is that the federal government regulates both types of financial institutions, including providing insurance for the deposits of customers against financial loss.

History of Credit Unions

In 1909, St. Mary's Cooperative Credit Association became the first credit union established in the United States. Credit unions first appeared during the mid-19th century in Germany to provide credit to farmers facing famine. These "peoples banks" gained popularity during the 1920s, providing credit to consumers in an era when commercial banks were disinterested in doing so. The Federal Credit Union Act took effect in 1934, forming a national system of regulation. By 1960, more than 6 million people had joined more than 10,000 credit unions nationwide. The National Credit Union Association, or NCUA and National Credit Union Share Insurance Fund were created in 1970. Credit unions remain viable in the 21st century, with nearly 90 million members of more than 7,900 credit unions, according to the NCUA.

Federally Insured Deposits

Banks and credit unions perform many similar functions, including maintaining deposit accounts for their customers or members. The federal government insures funds held in deposit accounts in the vast majority of banks in the United States against loss through bank failure through the Federal Deposit Insurance Corporation, or FDIC. The federal government also insures the deposits of credit union members held in deposit accounts against loss through the National Credit Union Share Insurance Fund, or NCUSIF,

Credit Union Membership

Bank customers are drawn from the general public. However, credit unions have a restricted customer base drawn from members who share an affinity of some type, such as employees of a company or residents of a particular region. As membership organizations, credit unions are self-regulated, with management by a board of directors drawn from and elected by the membership. As nonprofit institutions, credit unions belong to a network of organizations that also play a role in their regulation, including the Credit Union National Association and the World Council of Credit Unions, Verity Credit Union states.

Credit Unions and the Financial Crisis

Wholesale credit unions make investments and provide check-clearing services for individual credit unions. In 2009 and 2010, federal regulators seized five wholesale credit unions due to heavy losses incurred from bonds purchased from investment institutions including Goldman Sachs, Merrill Lynch and J.P. Morgan Chase. The investment firms had allegedly misrepresented the risks involved with the bonds, which lost half their face value before regulators intervened, the Wall Street Journal reported. Nonetheless, overall credit union failure rates are low, according to the NCUA.

References

• National Credit Union Administration: About Credit Unions
• National Credit Union Administration: History of Credit Unions
• Verity Credit Union: How Did Credit Unions Begin?; 2009
• Verity Credit Union: How Do Credit Unions Differ from Banks?; 2009
• The "Wall Street Journal"; Banks Hit for Credit Union Ills; Liz Rappaport; March 2011
• National Credit Union Administration: NCUA Share Insurance FAQ's Questions and Answers

Resources

• Verity Credit Union: How Do Credit Unions Differ from Other Financial Institutions?; 2009
• National Credit Union Administration: NCUA Organizational Chart
• National Credit Union Administration: Consumer Assistance Center
• National Credit Union Administration: Consumer Complaints
• National Credit Union Administration: Credit Union Resources
• Credit Union National Association
• World Council of Credit Unions; 2011
• Federal Deposit Insurance Corporation