A Brief History of Credit Unions
For more than 100 years, credit unions have provided financial services to their members in the United States. Credit unions are unique depository institutions created not for profit, but to serve their members as credit cooperatives.
The earliest financial cooperatives date back to the beginning of 19th century in England. A few decades later, credit unions took root in Germany. Organized by Herman Schulze-Delitzsch and Friedrich Raiffeisen, these early credit unions became the model for today’s credit unions in the United States. Distinguishing features of these German credit unions included:
- Democratic governance;
- Each member has one vote, regardless of the size of the member’s deposits;
- Member-elected board of directors; and
- Volunteer based.
The crop failure and famine of 1846 caused Schulze-Delitzsch to organize a cooperatively-owned mill and bakery that sold bread to its members at substantial savings. Schulze-Delitzsch took this cooperative notion to address the needs of credit, too. In 1850, he organized the first cooperative credit society, known as the people’s bank.
Raiffeisen sought to provide credit to farmers. He formed the Heddesdorf Credit Union in 1864 to help German farmers purchase livestock, equipment, seeds and other farming needs.
In 1900, at the start of the 20th century, the credit union concept crossed the Atlantic to Levis, Quebec, where Alphonse Desjardins organized La Caisse Populaire de Levis. A court reporter, Desjardins became aware of loan sharks charging outrageous interest. In response, he organized this first credit union in North America to provide affordable credit to working class families.
Nearly a decade later, Desjardins helped a group of Franco-American Catholics in Manchester, New Hampshire, organize St. Mary’s Cooperative Credit Association. This first credit union in the United States opened its doors in 1909.
As a result of the efforts of Edward Filene, a merchant and philanthropist, and Pierre Jay, the Massachusetts Banking Commissioner, the Massachusetts Credit Union Act became law April 15, 1909. The Massachusetts law served as a basis for subsequent state credit union laws and the Federal Credit Union Act, which became law 25 years later.
During the 1920s, the U.S. credit union movement became increasingly popular. Families had more money to save and could afford products like automobiles and washing machines. They, however, needed a source of inexpensive credit to purchase these goods. The popularity of credit unions grew because commercial banks and savings institutions generally showed limited interested in offering such consumer loans.
In 1920, Edward Filene hired Roy Bergengren, a poverty lawyer, to manage the Massachusetts Credit Union Association and to promote the development of credit unions. Within a year, Massachusetts chartered 19 new credit unions
Encouraged by this success, Filene organized and Bergengren managed a national association—the Credit Union National Extension Bureau—to promote the establishment of credit unions throughout the United States. By 1925, 26 states had enacted laws to charter credit unions. By 1930, 32 states had adopted credit union laws with a total 1,100 credit unions
In 1934, President Franklin Delano Roosevelt signed the Federal Credit Union Act into law, creating a national system to charter and to supervise federal credit unions. The credit union movement grew steadily in the 1940s and 1950s. By 1960, credit union membership amounted to more than 6 million individuals belonging to more than 10,000 federal credit unions.
In 1970, the National Credit Union Administration (NCUA) became an independent federal agency. Congress also created the National Credit Union Share Insurance Fund (NCUSIF) to protect deposits at credit unions.
The 1970s also brought major changes in the products offered by financial institutions. Credit unions, too, found they needed to expand their services. In 1977, federal legislation allowed U.S. credit unions to offer new services to their members, including share certificates and mortgages.
U.S. credit unions grew tremendously during the 1970s. The number of credit union members more than doubled during the decade, and credit union assets tripled to more than $65 billion.
Deregulation, increased flexibility in merger and field of membership criteria, and expanded member services characterized changes in the 1980s for U.S. credit unions. Early in the decade, high interest rates and unemployment brought supervisory changes and insurance losses, as well.
With the NCUSIF experiencing financial stress, the credit union community called on Congress to approve a recapitalization plan. In 1985, federally insured credit unions recapitalized the NCUSIF—a federal fund backed by the full faith and credit of the U.S. Government—by depositing 1 percent of their shares.
Throughout the 1990s and into the start of the 21st century, U.S. credit unions continued to expand as a group. Because few credit unions failed, the NCUSIF also prospered. Then the nation’s credit union industry faced profound and unprecedented threats to its stability in 2008 and 2009. A steep drop in global financial markets triggered the most severe economic downturn since the Great Depression.
The resulting cascade of job losses, bankruptcies, and home foreclosures exerted pressure on the entire American financial services sector—including credit unions. From the onset of the crisis, NCUA took decisive action and worked in concert with Congress, the U.S. Department of the Treasury, the Federal Reserve and other authorities to safeguard the U.S. credit union system
Many of the largest corporate credit unions in the United States, however, invested in troubled mortgage-backed securities that experienced dramatic, unprecedented declines in value, effectively rendering five of these institutions insolvent. The loss to the U.S. credit union system was sizable.
NCUA acted quickly to reduce the total losses resulting from the failure of these five wholesale corporate credit unions—U.S. Central Corporate, Western Corporate, Southwest Corporate, Members United Corporate, and Constitution Corporate. Specifically, the agency worked with Congress and U.S. Treasury Department to establish the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) to protect the NCUSIF and the stability of U.S. credit unions. Insured credit unions, not taxpayers, will pay back the costs of the Stabilization Fund over time.
In responding to the corporate credit union crisis, NCUA also took the following actions:
- After placing the five failed corporate credit unions into liquidation, NCUA re-securitized the problematic mortgage-backed securities that caused the failures and sold these notes in the marketplace with a government-backed guarantee.
- NCUA established a temporary share guarantee for deposits at corporate credit unions.
- NCUA established bridge corporate credit unions in conservatorship to ensure the services provided to consumer credit unions continued during the resolution and transition period.
- NCUA worked with members of the bridge corporate credit unions to transition services to new entities where possible.
Even as NCUA managed the corporate credit union crisis, the agency dealt with the declining fortunes of a number of consumer-owned credit unions. While the U.S. credit union system remained strong overall during the financial crisis, consumer-owned credit unions in several regions weakened as a result of spikes in home foreclosures, business failures, and unemployment. A number of these credit unions failed.
To protect against the failure of more credit unions, NCUA implemented a “red flag” early warning system to detect problems in individual credit unions before they became insurmountable. As part of this strategy, NCUA adopted a 12-month examination cycle for federally insured credit unions. NCUA also began to step up administrative actions wherever necessary to ensure prompt compliance. By year-end 2009, more than 96 percent of credit unions met the statutory definition of “well capitalized.”
Today, the U.S. credit union system continues to overcome economic challenges, but the industry has also demonstrated its resilience. NCUA also continues to work, enhancing a credit union system that is safe, sound, secure and serving more Americans than ever before.