ABCs of Banking Banks Thrifts and Credit Unions (2024)

ABC's of Banking

Provided by the State of Connecticut, Department of Banking,based on information from the Conference of State Bank Supervisors (CSBS)

Banks, Thrifts, and Credit Unions - What's the Difference?

There are three major types of depository institutions in the United States. They are commercial banks, thrifts (which include savings and loan associations and savings banks) and credit unions.

These three types of institutions have become more like each other in recent decades, and their unique identities have become less distinct. They still differ, however, in specialization and emphasis, and in their regulatory and supervisory structures.

Commercial banks are the traditional "department stores" of the financial services world. Thrift institutions and credit unions are more like specialty shops that, over time, have expanded their lines of business to better compete for market share. (Connecticut law, in fact, grants thrifts the same powers as commercial banks).

Commercial Banks

Commercial banks are generally stock corporations whose principal obligation is to make a profit for their shareholders. Basically, banks receive deposits, and hold them in a variety of different accounts; extend credit through loans and other instruments: and facilitate the movement of funds. While commercial banks mostly specialize in short-term business credit, they also make consumer loans and mortgages, and have a broad range of financial powers. Their corporate charters and the powers granted to them under state and federal law determine the range of their activities.

States and the federal government each issue bank charters. State-chartered banks operate under state supervision and, if they fail, are closed under provisions of state as well as federal law. National banks are chartered and regulated by the Office of the Comptroller of the Currency (OCC), a division of the Treasury Department. Banks can choose between a state or a federal charter when starting their business, and can also convert from one charter to another after having been in business. Commercial banks receive deposit insurance from the Federal Deposit Insurance Corporation (FDIC) through the Bank Insurance Fund (BIF). All national banks, and some state-chartered banks, are members of the Federal Reserve System.

Savings and Loans/Savings Banks

Savings and loan associations and savings banks specialize in real estate lending, particularly loans for single-family homes and other residential properties. They can be owned by shareholders ("stock" ownership), or by their depositors and borrowers ("mutual" ownership). These institutions are referred to as "thrifts," because they originally offered only savings accounts, or time deposits. Over the past two decades, however, they have acquired a wide range of financial powers, and now offer checking accounts (demand deposits) and make business and consumer loans as well as mortgages.

Both savings and loan associations and savings banks may be chartered by either the federal Office ofthe Comptroller of the Currency (OCC)or by a state government regulator. Generally, savings and loan associations are insured by the Savings Association Insurance Fund (SAIF), and savings banks are insured by the Bank Insurance Fund (BIF).

Savings institutions must hold a certain percentage of their loan portfolio in housing-related assets to retain their charter, as well as their membership in the Federal Home Loan Bank System. This is called the "qualified thrift lender" (QTL) test. Savings institutions must maintain 65% of their portfolio in housing-related or other qualified assets to maintain their status. Recent liberalization of the QTL test has allowed thrifts to use some non-housing assets to meet this requirement.

The number of thrifts declined dramatically in the late 1980s and early 1990’s. The savings and loan crisis of the 1980s forced many institutions to close or merge with others, at an extraordinary cost to the federal government. However, therewas a resurgence of interest in the thrift charter in following years. The recapitalization of the thrift fund, a revitalized industry and legislative changes made the charter – once thought doomed to extinction – an appealing route to financial modernization for some. Due to liberalization of the qualified thrift lender test, many insurance companies and securities firms, as well as commercial firms, are now able to qualify as unitary thrift holding companies and to own depository institutions, bypassing prohibitions in the Glass Steagall Act and the Bank Holding Company Act. Critics of a revitalized thrift charter have said that it has advantaged a certain class of financial institutions, highlighting the need for broader financial modernization through federal legislation.

Credit Unions

Credit unions are cooperative financial institutions, formed by groups of people with a "common bond." These groups of people pool their funds to form the institution's deposit base; the group owns and controls the institution together. Membership in a credit union is not open to the general public, but is restricted to people who share the common bond of the group that created the credit union. Examples of this common bond are working for the same employer, belonging to the same church or social group, or living in the same community. Credit unions are nonprofit institutions that seek to encourage savings and make excess funds within a community available at low cost to their members.

Credit unions accept deposits in a variety of accounts. All credit unions offer savings accounts, or time deposits; the larger institutions also offer checking and money market accounts. Credit unions' financial powers have expanded to include almost anything a bank or savings association can do, including making home loans, issuing credit cards, and even making some commercial loans. Credit unions are exempt from federal taxation and sometimes receive subsidies, in the form of free space or supplies, from their sponsoring organizations.

Credit unions were first chartered in the U.S. in 1909, at the state level. The federal government began to charter credit unions in 1934 under the Farm Credit Association, and created the National Credit Union Administration (NCUA) in 1970. States and the federal government continue to charter credit unions; almost all credit unions are insured by the National Credit Union Share Insurance Fund, which is controlled by the NCUA. In Connecticut, state-chartered credit unions are supervised by the Department of Banking, Financial Institutions Division.

Connecticut law allows for various types of specialized bank charters within these broad categories. For more information on particular charter types, see our page on organizing a bank.

Lesson Three: Banks and their Regulators

ABCs of Banking  Banks Thrifts and Credit Unions (2024)

FAQs

What is the difference between banks credit unions and thrifts? ›

Thrifts also refer to credit unions and mutual savings banks that provide a variety of savings and loan services. Thrifts differ from commercial banks in that they can borrow money from the Federal Home Loan Bank System, which allows them to pay members higher interest.

What three things do banks and credit unions have in common? ›

Similarities Between Credit Unions & Banks

For starters, both institutions offer savings accounts, personal loans, auto loans, mortgages and checking accounts. Both institutions provide services for individuals, and many provide businesses banking as well.

What is a thrift bank? ›

A thrift bank—also just called a thrift—is a type of financial institution that specializes in offering savings accounts and originating home mortgages for consumers. Thrift banks are also sometimes referred to as Savings and Loan Associations (S&Ls).

What are the 7 major types of financial institutions? ›

The major categories of financial institutions are central banks, retail and commercial banks, credit unions, savings and loan associations, investment banks and companies, brokerage firms, insurance companies, and mortgage companies.

What are 3 differences between a bank and a credit union? ›

But compared to banks, credit unions tend to be smaller, operate regionally and are not-for-profit. In many instances, they offer lower rates on loans, charge fewer fees and offer better interest rates for deposit accounts than traditional banks.

What are the two types of thrifts? ›

The two main types of thrift institutions are savings and loan associations and mutual savings banks.

Why do banks not like credit unions? ›

First, bankers believe it is unfair that credit unions are exempt from federal taxation while the taxes that banks pay represent a significant fraction of their earnings—33 percent last year. Second, bankers believe that credit unions have been allowed to expand far beyond their original purpose.

Why do people use credit unions instead of banks? ›

Credit unions can be ideal for a low-interest loan, lower mortgage closing costs, or reduced fees, but you'll need to qualify for membership. Larger banks may offer you more choices regarding products, apps, and international or commercial products and services, and anyone can join.

What is the 1 major difference between a bank and a credit union? ›

The main difference between the two is that banks are typically for-profit institutions while credit unions are not-for-profit and distribute their profits among their members.

Why are banks called thrifts? ›

A thrift institution is a financial institution that obtains the majority of its funds from the savings of the public. The term can include several cooperative banking models; Savings and loan association. Mutual savings bank.

What are the three types of thrift banks? ›

Types of thrift banks include savings banks, private development banks, and stock savings and loan associations.

What are the four main types of bank accounts? ›

The four basic types are checking account, savings account, certificate of deposit and money market account. Each kind of account serves a different purpose. For instance, a checking account is geared toward covering everyday expenses, while a savings account is designed to help achieve short-term financial goals.

What are the 4 types of financial institutions? ›

The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies.

What are the top 4 financial institutions? ›

The “big four banks” in the United States are JPMorgan Chase, Bank of America, Wells Fargo, and Citibank. These banks are not only the largest in the United States, but also rank among the top banks worldwide by market capitalization, with JPMorgan Chase being the most valuable bank in the world.

Which is better for you a bank or credit union? ›

Credit unions can be ideal for a low-interest loan, lower mortgage closing costs, or reduced fees, but you'll need to qualify for membership. Larger banks may offer you more choices regarding products, apps, and international or commercial products and services, and anyone can join.

What is an example of a thrift bank? ›

Examples of Thrift Bank

Lemery Savings and Loan Bank, Inc. Cordillera Savings Bank, Inc. Sampaguita Savings Bank, Inc. Liberty Savings Bank Inc.

What are the biggest differences between banks and credit unions? ›

Banks and credit unions both offer a number of financial products, including savings accounts and certificates of deposit (CDs). The main difference between the two is that banks are typically for-profit institutions while credit unions are not-for-profit and distribute their profits among their members.

What is one major difference between banks and credit unions? ›

What makes banks and credit unions different from each other is their profit status. Banks are for-profit, meaning they are either privately owned or publicly traded, while credit unions are nonprofit institutions.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Lidia Grady

Last Updated:

Views: 6435

Rating: 4.4 / 5 (45 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Lidia Grady

Birthday: 1992-01-22

Address: Suite 493 356 Dale Fall, New Wanda, RI 52485

Phone: +29914464387516

Job: Customer Engineer

Hobby: Cryptography, Writing, Dowsing, Stand-up comedy, Calligraphy, Web surfing, Ghost hunting

Introduction: My name is Lidia Grady, I am a thankful, fine, glamorous, lucky, lively, pleasant, shiny person who loves writing and wants to share my knowledge and understanding with you.