A look at the differences between banks and credit unions
February 2, 2018
If it looks like a duck and quacks like a duck, it might be a goose.
That's how George E. Burns, commissioner for the Financials Department of the State of Nevada, Department of Business & Industry, described the types of depository institutions in the state. They all handle money and extend loans, but they are not all the same.
The state of Nevada charters four such institutions: commercial banks, credit unions, savings banks, and industrial loan companies. Each has its own focus, ownership, and regulations, said Burns, who has been in the financial industry for 28 years in both giant and small financial institutions. He was appointed commissioner for the Nevada Department of Business & Industry in 2007.
Commercial banks are traditional banks, insured by the FDIC — what people traditionally think of as a bank, he said. They offer a broad range of financial services, including saving deposits, loans, mortgages, checks and debit cards.
Savings banks evolved from the savings and loan industry, which collapsed in the 1980s and 1990s. Their primary focus is on savings accounts, retirement savings, certificates of deposit and mortgages.
Industrial loan companies are owned by non-financial companies and generally provide loans for specific industries. For instance, in Nevada, Toyota Savings provides loans for Toyota products, and Eagle Mark provides loans for Harley Davidson products. Some industrial banks also issue credit cards, and offer mortgages or small business loans. They are state chartered and FDIC insured.
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Credit unions are similar to commercial banks, except that they are membership-owned nonprofits. As such, they don't pay taxes and because they don't pay taxes, they have more restrictions.
For credit unions, their field of membership (FOM) used to be very specific. Over time they expanded, Burns said.
Ten credit unions operate in Nevada and each has a different FOM. Members must be individuals, not businesses, and that's where some of the restrictions come in.
Originally, credit unions could only offer loans to individuals. Now they can offer loans to members for a members' business, but no more than 1.75 percent of the credit union's net worth.
"The amount they can loan (for a business purpose) is limited," Burns said. "If the focus of a credit union is membership as individuals, they can't go out and make a loan to say, MGM.
"It's being debated in Congress whether or not to expand the limit."
Additional differences divide the main two types of depository institutions — mainly by how they are chartered.
The federal government charters giant national banks like Bank of America and Citibank. The state charters smaller local banks such as Heritage Bank, Burns said.
Similarly, some credit unions are federally chartered by the NCUA to operate in multiple states, while the state charters Nevada-specific credit unions.
"Among credit unions in Nevada, there are two types, Federally Insured and privately insured by ASI. … Seventy percent of the credit unions in Nevada are privately insured.
"There is no such thing as private insurance for a bank."
Burns is familiar with all the forms of depository institutions, which are licensed through the state.
"Both (credit unions and commercial banks) have their purpose.
"It's like Ford vs. Chevy," he said.
"Corporations and large business entities are going to go to a commercial bank. Credit union members that need a small business loan can go to their credit union. They're just different."