ABCs of Banking Banks Thrifts and Credit Unions (2024)

ABC's of Banking

Provided by the State of Connecticut, Department of Banking,based on information from the Conference of State Bank Supervisors (CSBS)

Banks, Thrifts, and Credit Unions - What's the Difference?

There are three major types of depository institutions in the United States. They are commercial banks, thrifts (which include savings and loan associations and savings banks) and credit unions.

These three types of institutions have become more like each other in recent decades, and their unique identities have become less distinct. They still differ, however, in specialization and emphasis, and in their regulatory and supervisory structures.

Commercial banks are the traditional "department stores" of the financial services world. Thrift institutions and credit unions are more like specialty shops that, over time, have expanded their lines of business to better compete for market share. (Connecticut law, in fact, grants thrifts the same powers as commercial banks).

Commercial Banks

Commercial banks are generally stock corporations whose principal obligation is to make a profit for their shareholders. Basically, banks receive deposits, and hold them in a variety of different accounts; extend credit through loans and other instruments: and facilitate the movement of funds. While commercial banks mostly specialize in short-term business credit, they also make consumer loans and mortgages, and have a broad range of financial powers. Their corporate charters and the powers granted to them under state and federal law determine the range of their activities.

States and the federal government each issue bank charters. State-chartered banks operate under state supervision and, if they fail, are closed under provisions of state as well as federal law. National banks are chartered and regulated by the Office of the Comptroller of the Currency (OCC), a division of the Treasury Department. Banks can choose between a state or a federal charter when starting their business, and can also convert from one charter to another after having been in business. Commercial banks receive deposit insurance from the Federal Deposit Insurance Corporation (FDIC) through the Bank Insurance Fund (BIF). All national banks, and some state-chartered banks, are members of the Federal Reserve System.

Savings and Loans/Savings Banks

Savings and loan associations and savings banks specialize in real estate lending, particularly loans for single-family homes and other residential properties. They can be owned by shareholders ("stock" ownership), or by their depositors and borrowers ("mutual" ownership). These institutions are referred to as "thrifts," because they originally offered only savings accounts, or time deposits. Over the past two decades, however, they have acquired a wide range of financial powers, and now offer checking accounts (demand deposits) and make business and consumer loans as well as mortgages.

Both savings and loan associations and savings banks may be chartered by either the federal Office ofthe Comptroller of the Currency (OCC)or by a state government regulator. Generally, savings and loan associations are insured by the Savings Association Insurance Fund (SAIF), and savings banks are insured by the Bank Insurance Fund (BIF).

Savings institutions must hold a certain percentage of their loan portfolio in housing-related assets to retain their charter, as well as their membership in the Federal Home Loan Bank System. This is called the "qualified thrift lender" (QTL) test. Savings institutions must maintain 65% of their portfolio in housing-related or other qualified assets to maintain their status. Recent liberalization of the QTL test has allowed thrifts to use some non-housing assets to meet this requirement.

The number of thrifts declined dramatically in the late 1980s and early 1990’s. The savings and loan crisis of the 1980s forced many institutions to close or merge with others, at an extraordinary cost to the federal government. However, therewas a resurgence of interest in the thrift charter in following years. The recapitalization of the thrift fund, a revitalized industry and legislative changes made the charter – once thought doomed to extinction – an appealing route to financial modernization for some. Due to liberalization of the qualified thrift lender test, many insurance companies and securities firms, as well as commercial firms, are now able to qualify as unitary thrift holding companies and to own depository institutions, bypassing prohibitions in the Glass Steagall Act and the Bank Holding Company Act. Critics of a revitalized thrift charter have said that it has advantaged a certain class of financial institutions, highlighting the need for broader financial modernization through federal legislation.

Credit Unions

Credit unions are cooperative financial institutions, formed by groups of people with a "common bond." These groups of people pool their funds to form the institution's deposit base; the group owns and controls the institution together. Membership in a credit union is not open to the general public, but is restricted to people who share the common bond of the group that created the credit union. Examples of this common bond are working for the same employer, belonging to the same church or social group, or living in the same community. Credit unions are nonprofit institutions that seek to encourage savings and make excess funds within a community available at low cost to their members.

Credit unions accept deposits in a variety of accounts. All credit unions offer savings accounts, or time deposits; the larger institutions also offer checking and money market accounts. Credit unions' financial powers have expanded to include almost anything a bank or savings association can do, including making home loans, issuing credit cards, and even making some commercial loans. Credit unions are exempt from federal taxation and sometimes receive subsidies, in the form of free space or supplies, from their sponsoring organizations.

Credit unions were first chartered in the U.S. in 1909, at the state level. The federal government began to charter credit unions in 1934 under the Farm Credit Association, and created the National Credit Union Administration (NCUA) in 1970. States and the federal government continue to charter credit unions; almost all credit unions are insured by the National Credit Union Share Insurance Fund, which is controlled by the NCUA. In Connecticut, state-chartered credit unions are supervised by the Department of Banking, Financial Institutions Division.

Connecticut law allows for various types of specialized bank charters within these broad categories. For more information on particular charter types, see our page on organizing a bank.

Lesson Three: Banks and their Regulators

ABCs of Banking  Banks Thrifts and Credit Unions (2024)

FAQs

What is the difference between banks credit unions and thrifts? ›

Thrifts also refer to credit unions and mutual savings banks that provide a variety of savings and loan services. Thrifts differ from commercial banks in that they can borrow money from the Federal Home Loan Bank System, which allows them to pay members higher interest.

What are thrift banks? ›

Thrift banks, also known as savings and loans associations (S&Ls), or simply thrifts, are financial institutions primarily funded by consumer deposits. A thrift specializes in offering savings accounts and originating home mortgages for consumers.

What three things do banks and credit unions have in common? ›

Similarities Between Credit Unions & Banks

For starters, both institutions offer savings accounts, personal loans, auto loans, mortgages and checking accounts. Both institutions provide services for individuals, and many provide businesses banking as well.

What are the three types of bank deposits? ›

Types of Deposits

On the basis of purpose they serve, bank deposit accounts may be classified as follows: Savings Bank Account. Current Deposit Account. Fixed Deposit Account.

What is the classification of a bank? ›

Commercial Banks can be further classified into public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural. Apart from these, a fairly new addition to the structure is a payments bank.

Why are banks called thrifts? ›

A thrift institution is a financial institution that obtains the majority of its funds from the savings of the public. The term can include several cooperative banking models; Savings and loan association.

What are the classification of thrift banks? ›

Types of thrift banks include savings banks, private development banks, and stock savings and loan associations. Thrift banks prioritize serving the local community by offering competitive deposit returns and low-interest rates on mortgage loans.

What are the two types of thrifts? ›

The two main types of thrift institutions are savings and loan associations and mutual savings banks.

Why do banks not like credit unions? ›

First, bankers believe it is unfair that credit unions are exempt from federal taxation while the taxes that banks pay represent a significant fraction of their earnings—33 percent last year. Second, bankers believe that credit unions have been allowed to expand far beyond their original purpose.

Why do people prefer credit unions over banks? ›

People choose banks primarily because of the convenience of multiple branches across the country, along with better technology. On the flip side, people choose credit unions primarily because of discounted loan rates, higher interest rates and better customer service.

Why do people use credit unions instead of banks? ›

Credit unions operate to promote the well-being of their members. Profits made by credit unions are returned back to members in the form of reduced fees, higher savings rates and lower loan rates.

Is a credit union safer than a bank? ›

Generally, credit unions are viewed as safer than banks, although deposits at both types of financial institutions are usually insured at the same dollar amounts. The FDIC insures deposits at most banks, and the NCUA insures deposits at most credit unions.

Are credit unions safer than banks during a recession? ›

bank in a recession, the credit union is likely to fare a little better. Both can be hit hard by tough economic conditions, but credit unions were statistically less likely to fail during the Great Recession. But no matter which you go with, you shouldn't worry about losing money.

Which is better for you a bank or credit union? ›

The Bottom Line. Credit unions can be ideal for a low-interest loan, lower mortgage closing costs, or reduced fees, but you'll need to qualify for membership. Larger banks may offer you more choices regarding products, apps, and international or commercial products and services, and anyone can join.

Why bank with a credit union instead of a bank? ›

Credit unions operate to promote the well-being of their members. Profits made by credit unions are returned back to members in the form of reduced fees, higher savings rates and lower loan rates.

Why use a bank instead of a credit union? ›

People choose banks primarily because of the convenience of multiple branches across the country, along with better technology. On the flip side, people choose credit unions primarily because of discounted loan rates, higher interest rates and better customer service.

References

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