Dec 21 2015

Canadian Credit Unions: Different By Design

Not long after the 2007–08 financial crisis, The Economist magazine ran a headline that read simply “Mutual Respect.” Drawing on the European penchant for describing things in ideological terms, the accompanying article noted how Europe’s cooperative banks had “put their more capitalist-minded brethren to shame during the downturn.” Later in the article, The Economist added that “the fact that members of co-operative banks do not behave like owners may be to their advantage, because there is less incentive for them to take big risks to maximize profits.” Since then, a number of studies in the U.S., the EU, and elsewhere have reinforced the view that cooperative financial institutions, as a rule, fared better than, or at least as well as, joint-stock banks during the crisis.

But what about in Canada? And what about since the crisis? This research report finds that credit unions in Canada, like cooperative banks in Europe, really did (and still do) behave differently than banks, and these differences flow from the design of the credit union system. Credit unions generally hold on to more capital than banks do, because they cannot easily raise capital by issuing shares on a liquid exchange. Credit unions also hold less liquidity than banks because their asset mix is different, they are part of a network of credit unions, and they don’t have investment banking activities that rely on ready-access to large pools of liquid assets. And finally, credit unions, because they know their members, have strong records of prudent lending.

For policy-makers, this report is a timely reminder that “one size fits all” policies don’t work. For credit unions, it offers a sobering assessment of the challenges—and opportunities—that lie ahead.

Filene thanks its generous partners for making this important research possible: