Ask Chuck: Are credit unions safer than banks?

Dear Chuck,

With the threat of this banking crisis, we are looking for options in which to place our funds. We have enough cash to exceed the FDIC limit for couples with a joint account ($500,000). We have heard that credit unions are safer than banks. Is that true?

Looking for a Safe Harbor

Dear Looking for a Safe Harbor,

First, congratulations on having this amount of cash set aside in savings. That is no small accomplishment! Your question is relevant to us all due to the failure of several banks in recent weeks. Concerns about financial security worldwide are on the minds of all of those paying attention.

Bank woes

The FDIC (Federal Deposit Insurance Corporation) estimates that the unrealized losses held in hold-to-maturity bank books could total $620 billion across the banking industry. Factor in loans, and it could reach $1.7 trillion. You may be interested in learning what happens when a bank is liquidated. Fear and risk are undoubtedly rising in the United States and European banking systems. Two regulatory experts say that credit unions are safer than traditional banks. Let’s take a deeper look.

Credit unions

Credit unions are not-for-profit institutions that often cater to those who share a common characteristic, like military, religion, or employment in a particular industry. They offer many of the same products and services as banks. Because profits go into overall operations, loan costs are lower, and deposit rates are higher. Bank runs are rare and are typically driven by uninsured deposits, which average only 9% of the overall credit union deposits nationally.

Credit unions can fail like banks, but the National Credit Union Administration (NCUA) insures $250,000 per account like the Federal Deposit Insurance Corporation (FDIC) does for banks. Before depositing any money at a credit union, verify that they are insured, and read reviews. Here are some pros and cons of credit unions:

PROS:

• They have members (co-owners), not customers, and grant dividends/voting rights.
• They have lower fees and better rates.
• They may offer better customer service. Because they are smaller, they aim to better know and serve their members.

CONS:

• They require a small fee to join.
• There are limited branches and ATMS.
• They offer fewer services and less technology.
• Not all are insured by the NCUA.

Consider multiple options

The overarching principle that comes to my mind is diversification. Solomon’s wise advice to be prepared for any unknown disaster is to spread the risk around. A modern way of expressing this common-sense safeguard (likely derived from Solomon’s words) is “don’t put all your eggs in one basket.” Because of the amount of cash you are stewarding and because you are looking for “options,” you may want to have smaller accounts in a variety of institutions. Consider some in your bank, some in a credit union, and possibly some in an account with a wealth management firm that places funds in very low-risk accounts, such as CDs or Treasury Bills.

Economic forecasts for what is ahead

Neel Kashkari, Minneapolis Federal Reserve President:

“America’s worst banking crisis since the 2008 collapse of Lehman Brothers is pushing us closer to a recession. . . . Once we get through this period, we have to come up with a regulatory system that both ensures the soundness of our banking system, but is also fair and even so that community banks and regional banks can thrive. We do not have that today.”

Jeremy Siegel, Wharton Professor:

A critic of the Fed’s monetary policy, Siegel has said for months that central bankers should pause or pull back on interest rate hikes since a recession is “inevitable” if the Fed continues with a restrictive monetary policy. There’s no way central bankers can lower inflation and stabilize the banking system at the same time.

Art Laffer, former Reagan administration economist:

“I think there are a lot of cracks in the system, and I think we’re just beginning the financial problems because you’re going to see this pop up in all sorts of other areas because of leverage and because of a very sharp rise in interest rates.” He said the Fed should be following the markets, not leading them. “Silicon Valley is the direct consequence of the Fed aggressively trying to control markets.” He believes it is a major mistake.

No one knows the future

We live in a world that God designed to prevent us from being able to see one second into the future. To counteract our blindness to what may be coming, God beckons us to 1) walk by faith and not by sight, 2) know and obey His principles, and 3) stay informed. This is our greatest protection against risk of every kind.

I hope this has been helpful. Thanks for the great question! 

To gain more wisdom and insight into how you can effectively steward God’s resources—both time and money—the Crown Stewardship Podcast can be valuable. You can subscribe for alerts of new episodes. I hope you find it beneficial.