Report
390
Number
Dec 21 2015

Canadian Credit Unions: Different By Design

Since the financial crisis that began in late 2007, the financial soundness of deposit-taking institutions has been of particular importance to global policy-makers and central bankers alike. The negative impacts on the global economy that began with the U.S. housing market crash linger today, particularly from the perspective of financial institutions.

Report Number 390

Executive Summary

Canada’s financial system is often cited as being one of the most stable in the world, but although credit unions account for 9.6 percent of system-wide assets and 12 percent of deposits, the specific role they play in this dynamic is not well understood.

This report aims to help fill this void by assessing the financial soundness of credit unions over time, while providing relevant comparisons to chartered banks where possible. We consider credit union performance along three main indicators: capital adequacy, profitability, and liquidity. We do this using a framework recommended by the International Monetary Fund that is specifically designed to test the ability of deposit-taking institutions to withstand different types of stress.

Credit unions and chartered banks provide many of the same services and, at a glance, can appear to operate in much the same way. However, they have different mandates and governance structures that ultimately guide them to distribute value in very different ways. Banks maximize net income, value that is then distributed to external shareholders. Members own and manage credit unions for their own benefit.

The difference in mandates between the two types of institutions is a key theme of this report. The member-owned structure of credit unions ensures they have a lower appetite for risk than chartered banks. It encourages them to focus more heavily on lending to individuals and small and medium-sized enterprises, while foregoing potentially profitable but riskier opportunities, such as equity investments in domestic and foreign markets.