General Question

cockswain's avatar

If millions of people moved their money from banks to credit unions over the course of a year, what impact would that have on the economy?

Asked by cockswain (15271points) October 30th, 2011

I don’t really have a lot of details to add. I was contemplating this for a bit and want more opinions. I understand why a run on banks would be bad, but am uncertain how the transfer of the wealth would affect the economy. Hopefully your opinion is rooted in economic theory and not rhetoric.

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32 Answers

zenvelo's avatar

It would affect the profitability of big banks, but not necessarily have nay impact on consumers. If it was big enough, large banks would need to offer products to re-attract consumers, such as free checking and reduced fees. It’s already happened a bit with Bank of America; they’ve had to backtrack on the $5 monthly fee for using an ATM card.

The large banks might not be able to fund as many loans or mortgages, especially to businesses.

On the other hand, it would allow Credit Unions to offer more credit to consumers, and help parts of the economy that are more directly dependent on consumer demand. So there might be a bump up in car and house buying.

Cruiser's avatar

Very little as the money would still be sitting on the sidelines no matter where it was parked.

Jaxk's avatar

It could be disaster. If everyone tried to withdraw their money in a short period of time, the bank would not have enough cash to handle it. Banks use the deposits to make loans. Those loans have a long term payback. No bank holds enough cash to pay all the deposits in a short period. when they run out of cash they go bankrupt and the federal reserve pay off the amount insured and the rest get stiffed. The assets are sold (sometimes for pennies on the dollar) to other banks.

A run on the bank can kill an otherwise good business.

Facade's avatar

I never knew there was a difference between a bank and a credit union…

tranquilsea's avatar

@Facade A bank’s profits goes to shareholders via stocks. When you open an account at a credit union you buy shares with the opening of the account and they are usually a nominal amount. Any profit the credit union makes gets redistributed to all the account holders. They operate on the co-operative principle.

Facade's avatar

@tranquilsea I’ve always had my money in a credit union. When I moved out of state, people suggested I transfer everything to a local, big bank for the sake of convenience. I’m glad I decided not to; I try to support large corporations as little as possible.

gorillapaws's avatar

I never thought I’d say this, but @Jaxk is 100% correct.

The money would be infused in other areas, but if several of the major banks all failed at once our country would be pretty screwed. Now if people gradually migrated over (say over several years), big banks would be forced to reign in their investments over time and would slowly wither in a manner that is more healthy for the economy overall, while the credit unions would begin to increase investments over time with little impact on the overall economy.

I think credit unions are less sleazy in general and are worth looking into for many people.

This Graph shows why it would only take a few failures at the major banks to nuke the economy.

Afos22's avatar

@Jaxk Yea, It would kill the banks. But, people are starting to want that kind of thing around here.

cockswain's avatar

I may not have asked my questions specifically enough. I get what happens when we have a run on the bank, hence why I mentioned it in the details. This is why I asked what would happen if it happened over the course of a year. @gorillapaws alludes to the fact that maybe if it happened over several years it have minimal impact.

So I have two questions really: what is the rate at which consumers can transfer their money to credit unions to have minimal impact on overall economic activity, and secondly is it possible to have minimal impact on overall economic activity by taking massive amounts of money out of banks and into credit unions at some “slow” rate?

If we can’t take our money out of banks at any rate without hosing the economy, then we have a different discussion we need to explore.

YARNLADY's avatar

Maybe once the banks started losing their small, non-profitable customers, they would make more profits and we would see business only banks, and the rest of us, credit unions.

gorillapaws's avatar

@cockswain I think the rate of transfer would have to be fairly parallel to the rate that banks could reign in their investments. Banks would need to allow their current investments to mature and pay out, while simultaneously using that income to pay out those who are leaving. If the demand for payouts is too high, they will be forced to sell their investments for less than their true value (likely to credit unions who would be swimming in cash). If this happens too rapidly, the losses could be extreme to the point that they won’t have enough capital to pay out existing account holders. So really, it’s dependent on the rate they could sell assets and investments without taking much of a hit.

cockswain's avatar

@gorillapaws Yes, that makes sense. Not that I really see how such a transfer could actually be organized, with the banks working lockstep with the masses to assist in coordinating their own diminishing.

I don’t think the executives at the banks would even care if it did happen. After all, they have enough money to survive anything.

I see there is a movement on facebook to have everyone transfer their money to a credit union all on the same day. While I understand the symbolic reasoning behind the action, I don’t think that would be a good idea at all. And I think that’s a big problem with this OWS movement. While I’m personally pissed as hell about the wealth disparity in the US, the answer is not ignorant actions that would ultimately just cause more harm to the protesters.

zenvelo's avatar

I don’t think a solvent bank would fail in the traditional sense. They’d have to curtail lending, but they could put up assets for loans from the Fed and from other banks. Their business loans would continue to pay. Their reserves would cover a lot of their immediate outlays.

Banks complain all the time about how much consumer banking costs. This would be the public’s way of helping them avoid costs.

bkcunningham's avatar

You know what would probably happen? We’d bail them out.

jerv's avatar

@Jaxk Isn’t that because Fractional Reserve Banking is a house of cards?

@cockswain After many years of bad ideas followed by bad ideas and hearing all sorts of bad ideas come out of the current Congress, what is one more bad idea? We have been working against our own self-interests for so long that stopping now may be traumatic!

tedd's avatar

Honestly, it’s an unknown.

Obviously if everyone made a run on the banks it would probably cause a lot of big banks to fail, or at least suffer dramatically.

But by the same token the people would just be moving their money to credit unions and the like (in this scenario). So that additional money would mean the CU’s would pay more into the fund that pays people who own money in big banks that are going under (is it FCC? what is that called again?)

There would be some transition pains for sure. (though frankly I think we would be a lot better off since CU’s charge less and loan more)

zenvelo's avatar

@tedd Credit Union’s pay into a different fund – National Credit Union Share Insurance Fund. It’s not the same as the FDIC.

cockswain's avatar

Do you guys think moving our money into credit unions would help our nation?

zenvelo's avatar

Yes, it would. It would communicate to the banks they need to quit treating consumers like trash.

cockswain's avatar

Besides that, would it actually do anything to address the wealth inequality? I’m trying to think this through. No question it would lessen their access to funds on which to loan money, but do consumers represent a large enough portion of their funds relative to businesses? Not to mention that, at least at the moment, nothing stops banks from speculating and making risky investments. I don’t think (but am uncertain) that credit unions can do that.

tedd's avatar

@cockswain I can’t give you a percentage, but a huge chunk of big bank funds is in their profits from the various loans they give. If you take your money out and limit their ability, you definitely effect one of their big income sources, which frankly they have been taking advantage of in recent years (see the mortgage crisis that prompted our current economic downturn and destroyed several huge banks).

Credit Unions can make the same risky investments that big banks do, but by in large they do not because they are not for profit. They make enough money to pay their staff, build some reserves, but the rest of the “profit” is passed onto the members. They are not immune to corruption but tend to avoid it better than large banks. As such, CU’s are a lot more likely (again I don’t know the percentage, but I have seen the studies/reports) to loan money than a major bank. They also tend to give better rates.

The thought behind putting money in the CU’s is that the big banks would have to take notice and begin to amend their policies to compete with the CU’s. Unfortunately though, one of the huge side effects of being a non-profit entity such as a CU, is that you lack most advertisement funds, and you can’t really express to the public the fact you’re a better choice in many cases, than a big bank .

Afos22's avatar

I say, instead, move your money to smaller local banks, or keep your money in a safe.

tranquilsea's avatar

@Afos22 what’s wrong with Credit Unions? In my province your deposits are wholly guaranteed if they go bankrupt.

jerv's avatar

@tranquilsea Exactly! For the average person, there is no difference between between the FDIC and the NCUA; they both insure up to $250,000.

@Afos22 Why the hate for Credit Unions? Just curious. Most of them are small and local, so it can’t be a distrust of large financial institutions. As previously stated, your funds are insured the same. Could you please enlighten us?

bkcunningham's avatar

Big banks weren’t always around. I just wonder if this truely happened if the credit unions wouldn’t become the things that people hate about the big banks now.

cockswain's avatar

@bkcunningham I’m wondering the same thing as well. Power corrupts, but perhaps since they are owned by the people and the funds are being moved there as a general statement, maybe we could not repeat the mistakes of the past. But human nature is what it is, so I’m always a little pessimistic.

jerv's avatar

@bkcunningham Rule #1 of doing business; don’t piss off the shareholders.

Banks can power-shit all over their customers because the shareholders let them.
Credit unions cannot do that because all of their customers are shareholders.

bkcunningham's avatar

The banks in my small town growing up were owned by locals people. People like my father and others who were small business people had shares in the banks. The one bank where my dad banked is now a BB&T bank.

Do you think for a minute that those fellows would have turned down an offer to be bought back in the day? My dad owned an IGA grocery store and was raising 8 kids.

jerv's avatar

@bkcunningham Small businesses owned it, eh? Not everybody, just the larger customers?

bkcunningham's avatar

No, it wasn’t a credit union like you guys seem to think credit unions are today. What you have to understand, @jerv, is the town where I was born was incorporated in 1892. My dad was born in 1919. His father was a school teacher in a mining camp outside of this town. He is the one who started the grocery store. Of course it wasn’t an IGA in the beginning.

Everyone who lived in the area was a “businessman” in some shape or form in those days. Even if you were a farmer, you were a businessman. You might need to borrow money for new equipment or whatever. These families helped start and build the bank.

jerv's avatar

@bkcunningham That just shows you how things have changed over the years. Nowadays, a smaller percentage of people are actually in business for themselves; they are employees, working for someone else. And those changes mean that the finance sector has also had to change.

Society is changing again. Maybe banking needs to change again too.

BTW, your birth-town is just a baby. Try 1642! I may be wrong, but I think that barter was a bit more common when that town was founded.

Afos22's avatar

@jerv Sorry, I wasn’t exactly sure what a credit union was. Did my research though =)

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