Banks and credit unions: what sets them apart?

There are differences when it comes to financing fossil-fuel projects, technology investments, deposit guarantees, and overall risk-taking

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      Back in the mid-1990s, there was a very public battle between the Canadian Bankers Association and one of B.C.’s biggest credit unions.

      It erupted after Richmond Savings (which later become part of Coast Capital) launched an advertising campaign lampooning a fictitious “Humungous Bank”. It was led by greedy, uncaring executives eager to fatten profits at the expense of customers.

      The CBA was particularly vexed over the credit union’s tag line, “We’re not a bank. We’re better.”

      That’s because the Bank Act prohibited nonbanks, such as credit unions, from holding themselves out as banks at that time.

      In an affidavit filed with the federal trademarks branch, a CBA lawyer acknowledged that the average bank was 54 times larger than Richmond Savings. Therefore, he claimed, the credit union was misleading the public by claiming it was superior when it was “relatively less sound and secure”.

      Nowadays, bankers and credit union executives no longer engage in public spats like this. But they are still often competing for the same retail customers and residential-mortgage business. As a result, they’re not shy about touting their attributes.

      Only this time they are also dealing with growing customer anxiety over the climate and cybersecurity.

      In early January, the province’s largest credit union, Vancity, made a declaration on climate that caught the attention of its much bigger rivals based in Toronto.

      The Vancouver-based credit union promised to make its entire lending portfolio a net-zero carbon emitter by 2040.

      Vancity’s chief external-relations officer, Jonathan Fowlie, told the Straight by phone that he recalls sitting with staff in front of a whiteboard discussing changes coming as a result of the climate emergency. They considered providing bridge loans to help someone who is displaced from one industry to transition into another.

      It felt academic at the time, Fowlie said, but only a few weeks later the credit union was thrust into a real economic emergency with the pandemic.

      “It really crystallized for us the connection between climate action and the need for financial institutions not just to think about reducing emissions but also how we look at equality and people through the transition,” he stated.

      That led to five commitments, including financing an equitable climate transition.

      “Vancity has been acting on the environment and climate change for decades, and we do not lend to the fossil-fuel sector,” Fowlie said. “And so for us, that means that the pathway to net zero, as I said, is around working with our members to create large-scale change through an aggregation of supporting and enabling individual actions.”

      Vancity's chief external-relations officer, Jonathan Fowlie, is helping to steer the credit union's efforts to achieve a net-zero-emissions loan portfolio by 2040.

      Banks tout climate initiatives

      Coincidentally, less than six weeks later, CIBC announced that it had joined four large U.S. banks as a strategic partner in the nonprofit RMI’s Center for Climate-Aligned Finance. It’s helping the financial sector try to steer the global economy toward a transition to net-zero greenhouse-gas emissions by the middle of the century.

      A week after the CIBC declaration, Canada’s largest bank, RBC, announced that it would achieve net-zero emissions on its lending by 2050. In addition, it promised to mobilize $500 million toward “sustainable finance” by 2025.

      Meanwhile, another of Canada’s large banks, TD, has also expressed a desire to achieve net-zero emissions by 2050. BMO unveiled a new climate institute in March and Scotiabank established a climate change centre of excellence.

      The CBA website outlines other actions by the banks in this area. According to CBA director of media strategy Mathieu Labrèche, all the large banks are already working on implementing climate-related disclosures advanced by the Michael Bloomberg–chaired Task Force on Climate-Related Financial Disclosures.

      “I think TCFD, essentially at this point, has become the gold standard, globally,” Labrèche told the Straight by phone.

      But the banks still have a public-relations problem in this area. That’s because on March 24, Canadian banks didn’t fare very well in a report released by several environmental groups, including the Sierra Club, Rainforest Action Network, and Indigenous Environmental Network.

      Banking on Climate Chaos 2021 listed Canada’s five biggest banks among the top financiers of fossil-fuel companies in the world.

      RBC ranked fifth; TD was ninth; Scotiabank was 11th; Bank of Montreal was 16th; and CIBC came 22nd.

      The report declared that in the five years since the Paris Agreement was negotiated to restrict future emissions, the world’s 60 biggest banks have offered US$3.8 trillion in financing to the fossil-fuel sector.

      According to this video created by the Rainforest Action Network, JP Morgan Chase has been the largest financier of the fossil-fuel industry over the past five years.

      Deposit guarantees differ

      Where the banks are on firmer ground might be with their investments in technology.

      The CBA’s vice president overseeing banking transformation and strategy, Marina Mandal, told the Straight by phone that the six largest Canadian banks invested approximately $100 billion in technology from 2009 to 2019.

      A lot of that, she said, was aimed at ensuring Canadians feel comfortable banking online and through mobile devices, knowing that their data is protected. She insisted that banks are “absolute leaders in data protection, cybersecurity, and privacy”.

      “But also, it’s an ongoing effort as we see new threat actors across the board,” Mandal noted.

      So where else might federally regulated banks be “better” than provincially regulated credit unions?

      She pointed to advantages created by a “comprehensive credential and consumer protection framework” created by federal regulators such as the Office of the Superintendent of Financial Institutions and the Financial Consumer Agency of Canada, backstopped with policies developed by the Ministry of Finance.

      “You’re basically getting the benefit of something across the country that is aligned,” Mandal said.

      The B.C. Financial Services Authority does this for authorized provincially regulated financial institutions, including the credit unions. The only exception is Coast Capital, which elected to be federally regulated and which is a member of the CBA.

      There are higher deposit-insurance guarantees for provincial credit unions in B.C. than federally regulated banks.

      The Canada Deposit Insurance Corporation, for example, limits payments to $100,000 per depositor per federally regulated institution in seven categories.

      The Credit Union Deposit Insurance Corporation of B.C., on the other hand, backstops all deposits in its specified accounts.

      But according to Mandal, “there have been concerns expressed by provincial governments and other stakeholders about the sustainability of that.”

      “So depending on your perspective, it’s either a good thing or a bad thing,” she said.

      Murray State University assistant professor of accounting Christine Naaman was the lead author on a recent paper comparing banks and credit unions.

      Banks take more risks

      Boards of directors of Canadian banks are elected by shareholders, whereas credit union boards are elected by their members. Bank dividends go to shareholders whereas credit union dividends go to members.

      A recent paper published in Research in International Business and Finance compared 636 banks and 636 credit unions matched by the largest loan category, size, and county locations in the United States from 2010 to 2017.

      “Our multivariate analysis results suggest that, in general, credit unions engage in less risk-taking than banks, irrespective of the risk measure being considered,” researchers Christine Naaman, Michel Magnan, Ahmad Hammami, and Li Yao concluded.

      “However, regulatory oversight (i.e. federal or state charter) reduces the risk-taking gap between banks and credit unions," they added. "We further find that increased competition has different effects on risk-taking behaviors in credit unions and banks.”

      The lead author, Naaman, is an assistant professor of accounting at Murray State University. She obtained her PhD at the John Molson School of Business at Concordia University in Montreal, where Magnan, Hammami, and Yao are faculty members.

      The last two Canadian bank failures occurred in 1985 when the Alberta-based Canadian Commercial Bank and Northland Bank collapsed. There were no bank failures during the Great Depression. When B.C. credit unions have faced higher risks, regulators have encouraged mergers.

      Coast Capital not only includes the former Richmond Savings, but also the former Pacific Coast Savings and Surrey Metro Savings credit unions. Prospera Credit Union was created through a merger with Westminster Savings.

      Back at Vancity, Jonathan Fowlie said that because banks and credit unions control trillions of dollars, they can collectively have an enormous impact on the direction of the economy.

      He said that because his financial institution is owned and directed by its members, this has a “significant impact on the way we think about these things”.

      “When we get to net-zero matters a lot, obviously,” Fowlie declared. “But even more important is how we all get there and whether we leave people behind. When you look at Vancity’s commitments, we’re taking a people-centred approach.”

      He left it unsaid whether the same is true for Canada’s humungous banks.