Does mutuality immunize us from financial contagion?

[dcorking]

I feel a little bit safer with my family savings in our credit union. Here's why.

In a mutual, all the funding comes from friends, neighbours and colleagues. And all the loans go to members of that same community. Therefore, it is immune from international crises, isn't it? In principle, yes, but it is not quite that simple.

Some of the largest credit union systems call themselves co-operative banks. These, like other banks, often get some of their funding, not from members, but from the international bond and money markets. A few, like giant Credit Agricole, even sell some of their own shares on the stock market.

If many members have a common employer, many of us could lose our job at the same time. So, a large number of borrowers could end up rescheduling or skipping loan repayments.

Credit unions don't keep bullion reserves in a safe in the back of the office. The excess of deposits over loans that every credit union and building society must have, is probably deposited at a bank. A cautious credit union will spread its cash among deposits at several banks.

Meanwhile, in times of crisis, people cut back their spending and increase their savings. Nationwide Building Society had a rapid increase in deposits during 2008, increasing its stability.

In the UK, the US, and some other countries, your credit union and building society savings are protected, like bank deposits, by government-sponsored deposit insurance.

Members know that their neighbours and colleagues depend on their credit union. So they will make extra effort to make their loan repayments on time, and are less likely to withdraw their savings in a panic.

Mutuality does not inoculate us from a crisis at the capitalist banks. But a well run credit union gives me a little more peace of mind.

[jharrington]

very interesting and true . Credit unions and Cooperatives if they have followed Cooperative principles of Prudence can sit back and and say we told you so. The Cooperative Model is the best one, may be not exciting and it dosnt pay staff millions in bonuses.

Southern Cooperative a retail Coop has one million pounds of members share capital backed by one hundred million of on and off the balance sheet reserves. If there was a run on it they could all have their share capital back with no effect on the society.

Thanks for the nice words about Credit Unions they dont have they same reserves as the retail Coops but being smaller have loyal local members, I hope

John Harrington Director 'Hampshire Savers ' a newish credit union

[bill]

My thoughts exactly! How many MPs does the movement sponsor? I haven't heard a single one extolling the virtues of mutuality, as against corporate greed, during the current crisis in Capitalism.

The movement must seriously consider if these people represent value for money.

Bill

[dcorking]

I don't know the cause of the difficulties that led Cheshire and Derbyshire Building Societies into the arms of the Nationwide. Nor do I fully understand what caused many US mutual thrifts to fail in the 1980s. An open question that historians will have to answer is: did they get into trouble because they weren't sufficiently mutual?.

We do know that "Washington Mutual" (seized by the FDIC last month) was very far from mutual, and I am pretty sure that lack of attention to mutuality contributed to the failure of the thrifts.

[dcorking]

A friend suggested to me that my confidence is "wishful thinking".

I should re-emphasize that a well run credit union gives me a little extra piece of mind, over an investor-owned bank.

Just like investor-owned businesses, things go wrong. Also, not everything called "mutual" is as strictly regulated as a credit union. Londoners have probably already heard about Ethnic Mutual Limited, a business loan society: the FSA's consumer website posted an updated alert about it last week (www.moneymadeclear.fsa.gov.uk/news/firm/firm_news.html)

See:
Regulator shuts business charity BBC News, 14 March 2008

[dcorking]

In yesterday's news, seven of continental Europe's giant co-operative banks made a technical deal "to restore confidence in the European banking market"

It is a good feeling to be told that the co-operative movement is able to respond to the crisis, even though I have my concerns about how co-operative those banks are.

[dcorking]

Have you seen this example of where co-ops were not immune? From last week's papers:
http://www.boston.com/business/articles/2009/02/13/paying_a_giants_price/

All credit unions insured by the NCUA will share the tab, which will amount to about 0.56 percent of their assets. That seems like a small number, but the industry only makes a profit equal to about 0.49 percent of assets a year.