John Harris applauds credit unions

And I respond in the comments:

The way credit unions operate goes against the orthodoxies of finance.

Well, not so much.

Actually, it\’s pretty much the basics of banking and has been for a number of centuries.

Lend money at interest to those you think will pay it back. Borrow the money at a lower interest rate from a different group of people. The second group are your depositors.

That plus borrowing short and lending long (ie, you tend to lend the money out for longer periods than you borrow it for) is banking.

\”Unlike the banks, it can only lend money that it actually holds: its deposits total about £1.5m, and there\’s £1m on its loan book.\”

This is also true of any bank. Loans must equal deposits plus capital. And the big banks make very sure of this too, they balance their books at the end of every banking day.

The difference is that if a big bank has lent out more that day than it has taken in in deposits then it goes and borrows it from another bank: that is, it gets a deposit from another bank to make the books balance.

This is known as the interbank market and it\’s worth about £20 trillion a year in movements of money.

That interbank market is just another way of getting more deposits.

It is true that credit unions don\’t tend to use the interbank market but there\’s no theoretical reason (nor legal as far as I know) that they cannot. It\’s a choice they make.

\”Now, BANKs, they don\’t work like that. If a bank has £10 it can lend £80 pounds. It doesn\’t make sense but its the law. It\’s called leverage.\”

This is not true. The banking system as a whole, because of fractional reserve banking, does work out that way. But it is not true for any one individual bank. One individual bank must match loans against deposits and capital.

BTW, just so you know, baby eating neoliberal bastards like me, you know, near fascists in pursuit of capitalism…..we\’re all in favour of credit unions. Mutuals of all types indeed. You want to organise your affairs that way then you just go right ahead. It\’s your money and your life and we\’re the guys who applaud your liberty and freedom to do as you wish with both.

\”She\’d been brought up in care and had virtually no idea of what officialspeak calls financial literacy.\”

Something of a condemnation of the State there, don\’t you think? If, when responsible for the entire education of a child, they fail so badly then why do we insist that said State must be responsible for part of the education of all children?

11 comments on “John Harris applauds credit unions

  1. I love the bit about being “fascist in pursuit of capitalism”. Wonder how many of the readers will get it.

  2. Shame there was no mention of what credit unions could do to better get to those who find themselves trapped by predatory lenders. A law change that raises credit unions’ interest rate ceiling so as to equip credit unions with the means of a home credit service might be interesting, eh’ Tim?

  3. it sets great store by carefully examining any application for credit, and offering annual rates that peak at 26.8%

    Credit union interest rate cap is 1% per month? s11 Credit Unions Act 1979. Maybe my maths is bollox but 1.01^12 is only marginally more than 12.6%. Doing it on a reducing balance basis gives you between 15 and 16% APR depending on whether you add the interest on an end of month or start of month basis. So a credit union able to charge a 26.8% APR is already well above the current legal limit.

    Obviously something else is going on. It may well be my maths.

  4. @Carl: ‘…those who find themselves trapped by predatory lenders…’

    You mean people who borrow money that they can’t afford to pay back so as they can spend it all on shiny stuff?

  5. Yes, the key fact about fractional reserve banking is that £80 loan from a £10 deposit will eventually end up back in a bank somewhere in the UK. Meanwhile other banks make similar loans and these end up in our original bank.

    Overall the deposits and loans balance.

  6. Blue Eyes..

    I think the answer to that is ‘no’. I had a look at my local CU and theire ‘dividend’ is 1%. They have around £1m of funds under management, and had income from loans of about £230k.. and operating costs of, er, about £500k before bad debts and said dividend. That they reported a surplus seemed to be only because of significant income from ‘grants’.

    The problem is, when your loan book is that small, the income simply won’t cover your fixed costs (this CU spends £300k+ on staff, AND relies heavily on volunteers). There’s really not a lot left to hand back to the people who provide te funding.

    Assuming that most CU’s are on simlar or lesser scales (this one counts as a large one, apparently) it’s really not a good model from a financial perspective – albeit that the approach to lending (and associated financial education) should have undoubted social benefits – so one could certainly consider depositing and accepting the low return as a pseudo-chartiable donation… and there’s no tax relief on it, so Riche won’t mind.

  7. “Now, BANKs, they don’t work like that. If a bank has £10 it can lend £80 pounds. It doesn’t make sense but its the law. It’s called leverage.”

    Of course, he’s confusing capital with assets. I’d love to hear him explain how – using his own figures – those depositors with 1.5 mil banked in a credit union can get their money back all at once given that a million has been lent out.

  8. As Mark Wadsworth says, effectively banks just create money for a mortgage, which gets paid to another bank and cancelled instantly. The new “homeowner” has just pledged to slave for the bank for the next 25 years.

  9. Oh its alright that the private sector banking system creates money by the pyramid of loans in FRB is it? Then why is n’t this money rightly the property of the public? All the interest payments could defray/replace tax.

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