How Have Credit Unions Survived the Crisis?

John Gapper has post up about "the enduring financial advantages of mutuality", talking about insurers, investment banks, and British building societies. The ones which went public got an immediate windfall upside, but also a longer-term downside:

One effect was that they took more risk in order to raise revenues and profits, and thus satisfy their public shareholders. Another was that they exposed themselves to a crisis of confidence, either in wholesale funding markets or the stock market…

The remaining mutuals are, in general, in a stronger and less exposed position as a result of their accumulated capital and non-public status.

Gapper doesn’t mention credit unions in the US, which is a pity. There have been no major credit union failures during this crisis, and I think that their mutual status has helped them weather it (so far) much more ably than the banks.

Credit unions were much more likely than banks to be assiduous mortgage underwriters, and to hold their own loans rather than selling them on: they generally avoided getting caught up in the originate-to-distribute model.

But it’s also worth noting another possible reason why credit unions have held up so well: they don’t mark their assets to market.

If credit unions were forced to mark to market, then the cashflow from all their long-term assets, including mortgages, would have to be discounted at current crazy credit-crunch interest rates. That would in turn reduce the value of those assets, hitting their capital base and possibly setting off a vicious spiral of write-downs and dearer money.

But since credit unions don’t mark to market, that hasn’t happened, and so far at least, confidence in credit unions seems to have held up very well.

I’m not saying that this survival technique would work for a public company — it probably wouldn’t. But it does go to show that a healthy financial system can exist without mark-to-market accounting.

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