Little banks, big success

 By Don Shall

You might expect that, after one of the worst banking crashes in history, that the smallest banks of all might be suffering the most.  But, at least in the USA, the credit union sector is not only doing rather well, they are doing better than the big banks.

There are 7,600 credit unions in the USA, though many of them are giants compared to their equivalents in the UK, at least in England (Ireland’s credit unions are much more established, on both sides of the border). 

Since the start of 2009, US credit unions have added more than 1.5 million new members. Their deposits grew by a tenth in 2009 and are on track to grow even more this year.

With those gains, credit unions now hold 10 percent of all deposits in the USA, up from 9 percent at the start of the crisis.  That may not seem much, but it took them 14 years to grow the one per cent from 8 to 9.

Most remarkable, while big banks slashed lending in 2009, credit unions actually made more loans, particularly to small businesses. As giant banks shut off the flow of credit to small business, shrinking their overall business lending by 22 percent, credit unions increased their lending to small businesses by 10 percent.

The growth is partly to do with the innovative Move Your Money campaign led by Rob Johnson – now head of George Soros’ Institute of New Economic Thinking – and the online newspaper the Huffington Post.

Credit unions are mutuals – though this is not a word in common use in the USA – and every member has one vote in major management decisions.

Recent data also suggests that, as the New Rules campaign puts it, “small is pretty efficient”.  The small banks in the USA have radically lower charges than the big banks.

Also, more surprisingly, the New Rules project found that small banks and credit unions have far fewer bad loans than big banks – just over one per cent in 2009, compared with getting on for four per cent for the big banks. 

Why?  Because small banks are flexible enough to make their loans more or less face to face.

“Their loan decisions are less credit score-based and more character-based,” said Rafael Morales of the National Federation of Community Development Credit Unions.  “It's much more of a personal relationship and that improves the decision-making on both sides: the institution is more likely to lend and the borrower is more likely to repay," explained which represents credit unions operating in some of the nation's poorest communities.”

None of this suggests that US credit unions don’t’ face huge challenges, but there is an enormous difference between the USA and the UK.  We have credit unions in the UK, but – generally speaking – we don’t have small banks any more.  We don’t have the choice to move our money over here – but we will.