Banks and Credit Unions

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Last Updated: Tuesday, 11 July 2023 13:40

Published: Sunday, 30 August 2020 15:33

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Banks and credit unions (CU):

You can deposit your money in either a bank or a credit union. Banks are for profit while credit unions are not for profit (profit is distributed to members in form of higher deposit rate and lower loan rate than banks). However, membership to credit unions is usually limited to people living in a particular area or being an employee of particular company, etc, while membership to banks is open to anyone nationwide. Banks are much larger compared to CU.

The way equations works for banks/CU is as follows:

Banks have assets (loans are considered assets for banks, there may be other assets as securities (stocks, bonds, etc), other tangible assets as real estate property, etc). All of these make money for banks, as banks collect interest on these. This money made on assets is the yield on assets (avg 5%). Loans are considered assets as banks give out loans based on some physical asset (like a house, car, etc), and that is the property of the bank as long as the loan is not paid off.

Banks have liabilities as deposits, borrowings, etc on which they have to pay interest. This is called cost of funds, and is usually 1% depending on current fed interest rate. Deposits are considered liability for banks, as the money doesn't belong to bank, they have to return the money back to depositors. It's a low interest debt that banks have taken from people.

Difference between the two is the gross spread (usually 4% to 5%). Once we add provision for loan losses (0.5% - 1%), we get NIM (net interest margin). This has historically averaged about 3% for banks/CU in USA.

Banks also have other interest income, as service fees, monthly fees, overdraft, consulting fees, etc. This becomes total income, from which we subtract bank expenses (as offices, salaries, etc) and taxes. This gives us net income which is usually 1% of assets.

So, in essence you can see banks/CU as middle man who take money from depositors at lower rates and lend it to borrowers at higher rates, pocketing the difference.

This site lists a lot of info about banks/CU, checking/savings + CD rates. etc => https://www.depositaccounts.com

Here they list the largest Banks + CU: https://www.depositaccounts.com/banks/assets.aspx

Banks:

Money that you deposit in banks is insured by FDIC (www.fdic.gov), which is a corp of govt providing insurance to any deposit in a bank of up to $250K in a single owner account. Meaning even if the bank goes bankrupt, your money up to $250K will be returned to you by FDIC. FDIC website lists all info regarding all banks. Whenever you open an account with any bank, always go to FDIC website and search for that bank. Make sure, it's listed there, and follow the link for that bank from FDIC website.

Banks are further classified as commercial banks and thrift/savings institutions. Both are similar. As of Q2 2018, there were total of 5500 FDIC insured banks. In 1990, there used to be 15000 banks. The reason for falling numbers is that every year about 3% of banks merge, and very few new ones open. Some credit union also convert to banks, since it's more profitable to be a bank and hence higher payouts.

As of Q2, 2018, stats for all 5500 banks is as below: 2018 Q2 report available here: https://www.fdic.gov/bank/analytical/qbp/2018jun/qbp.pdf 

There is historical bank report here:

Income: https://www.fdic.gov/bank/analytical/qbp/timeseries/annual-income.xls

Balance Sheet: https://www.fdic.gov/bank/analytical/qbp/timeseries/balance-sheet.xls

In 1990, there were 2M full time employees in banks, same as in 2018. If you see trend from 1987 to 2017, you will notice that interest expense has been coming down (expected as interest rates have been going lower every year. Today it's just 1/4th of what it was in 1987), but interest income has been going up (not expected with declining rates. Today it's 2 times of that in 1987). This shows that banks profits have come at cost of savers, who get nothing for their savings, and borrowers who still pay much higher rates for borrowing. Result is fatter and fatter bank profits every year in declining interest rate environment of last 30 years (where interest rate for borrowers do not fall as much as those for savers. Banks pocket extra interest), with interest income going from $90B in 1987 to $500B in 2017.

FDIC has $95B in deposit insurance fund (DIF) to pay for any losses resulting from banks bankruptcy. This is 1.35% of total insured deposits (=$7.3T, while total deposit=$12.2T)) in banks. This is much larger than what has historically been in DIF.

Below data is for 2017/2018:

Total domestic deposits = $12.2T => includes money deposited in interest bearing accounts=$9T (CD=$1.8T), non interest bearing=$3.2T. Interest/non-interest can be savings, checking, money market,etc. (In 2005, deposits were $6T, so growth rate=6%/year or about the same rate as GDP growth). There's also additional $1.2T deposit in foreign offices.

Total loans made out = $9.8T => This includes real estate loans (Total=$5T, residential=$2.5T, non-residential=$1.5T, home-equity=$0.4T, construction/development=$0.4T), commercial and industrial loans ($2T), individual loans ($1.7T of which credit card=0.8T, auto=0.5T), and other loans of $1T

Total assets = $17.5T => includes loans=$9.8T, securities=$3.6T(MBS=$2.1T, Treasury=$0.5T, state/municipal=$0.4T, equity=negligible at $5B), Cash=$2T, Intangible assets=$0.4T, other assets=$0.8T. Earning asset is $15.8T.

Total liabilities = $15.5T => includes deposits=$13.4T,  Federal Home Loan bank advance (FHLB are GSE which can provide debt at very low rate of interest as they are backed by govt) = $0.6T, borrowing=$0.6T, other liability=$0.6T

So, banks use deposits and borrowing to fund loans and buy securities. Banks must be getting very low rates for borrowing (lower than what they pay on deposits), otherwise banks would always raise extra cash by increasing interest rates on deposits.

Net interest income (2017) = $0.5T (interest income=$572B (loans=$450B, securities=$80B), while interest expense=$73B(deposits=$47B, borrowings=$23B)). So, just from deposits, banks made $0.4T in interest income, paying avg of 0.3% in interest on deposits, while getting 5% on loans, resulting in interest of 4.7% just from deposit accounts). Provision for loan losses was $50B or 0.5% of loans.

Net interest margin (NIM) = net income income (after accounting for loan loss provision) as percentage of assets. Here it's $0.45T interest income on $13.4T in assets (including only loans and securities) = 3.4% (usually averages 3%) of assets. This is the difference between interest that banks get on loans/securities vs what they pay in deposits/borrowings. For ex, if banks pay 1% avg in deposits+borrowings, but get 5% avg on loans, then NIM=5-1=4%

Net income = $160B (interest income=$450B, non interest income=$250B, expenses due to offices, salaries, etc=$$450B, so, net income before taxes=$260B and then taxes=$100B). Of this $160B, cash dividend of $120B was paid out to shareholders of bank, while $40B was kept on banks book (retained earnings).

Largest banks in USA:

Here's the link for largest banks => https://www.depositaccounts.com/banks/assets.aspx?instType=bank&stateType=hq&state=

Data as of Q2, 2022: Chase, Bank of America, Citi and Wells Fargo are 4 largest banks with each having assets around $2T (so 50% of total bank assets are owned by just these 4). Since the 2009 recession, citi group has become much smaller and operates mostly online in most states (it has sold most of it's branches to other banks). However, it still retains a large deposit, in spite of having just 20M accounts (other top 3 banks have more than 60M accounts each). Chase bank has the largest deposits at $3.3T, while Wells Fargo deposits have been declining since the scandal of opening fake accounts came to light. Total deposit for all banks combined is about $20T out of which top 4 banks have total $10T in deposits. Just top 10 banks have 400M customer accounts, implying most of the US population has multiple bank accounts.

Only 50 banks have assets over $50B, While only 150 have assets over $10B. 1000 out of 5000 banks (or 20%) have assets > $1B. What's surprising is that big banks pay almost 0% interest on any of their products (savings a/c interest rate=0.01%, CD rates are all much less than treasury interest rates), yet they get so much in deposits.

Credit Unions:

Credit unions are set up as non-profit, and money is insiured via NCUA https://www.ncua.gov. It's as safe as in banks with FDIC, as NCUSIF (NCU share insurance fund) is backed by US govt, just as FDIC is backed by US govt. Terms and conditions for insurance in CU same as those for banks. There are 5500 CU as of Q2 2018, almost same number as banks. However their assets are mush less, at about 10% of the assets of the banks. They do have large number of members at about 120M.

Below data is for 2017/2018:

Total deposits in CU was only $1.2T

Total loans were at $1T (home loans=$0.45T, Auto loans=$0.35T, credit card=$0.06T, student loans=$5B, others=$0.15T).

Total assets were $1.5T (loans=$1T, cash=$0.1T, securities=$0.3T). 90% of the investment in securities is for those with maturities < 5 years.

NIM = $42Bx4 = 3.1% of assets

Net income = $13Bx4 = Provision for losses was 0.5% of assets

Largest Credit Unions in USA:

Here's the link for largest credit unions => https://www.depositaccounts.com/banks/assets.aspx?instType=cu&stateType=hq&state=

Data as of Q2, 2022: Navy Federal CU (NFCU), State Employees CU, Pentagon Federal CU (PenFed), Boeing Employees CU (BECU) and School First Federal CU are 5 largest CU with assets > $25B. There are only 20 CU with assets > $10B. Only 500 FCU (or 10%) have assets > $1B. Navy FCU with assets of $150B is the only CU that makes it in list of top 50 banks. Navy FCU is bigger than bottom 90% of FCU combined. Bottom 3200 CU combined have assets < $50B. They hold only 4% of total assets of CU, so we can see that money is mostly being controlled by top 10% of CU.

Summary:

So, total assets combined for banks and CU is $19T. Total deposits=$13.4T, while total loans=$10.8T.

We can see that out of 11K banks and FCU, only 300 or so hold 95% of total banking assets, meaning 97% of banks are almost irrelevant as to whether they exist or die. Also, only 1% of banks/CU actually pay interest rate higher than those of treasury (and these are usually much smaller banks and CU, very few in top 300). That seems very odd, since a person may buy treasuries instead of depositing money in banks, since both of them are insured by the same US govt. In a free market, banks have to pay higher interest rate than treasuries,  since there is no way that banks can borrow money comparable to treasury rates from consumers (since money in treasuries in 100% risk free, as govt can always print money to pay back the buyers, while banks can default on money they borrow. So if both banks and govt paid same interest rate, a borrower would prefer to just loan it to the government).

Deposits are cheapest way of raising money for banks, and rates have to be at least same as treasury rates. If bank deposit rates are lower than current treasury rates, and they can successfully attract sufficient deposit, then banks can make infinite free money. This is how => they can take deposits from people at rates lower than treasury, put that money risk free in treasury (no risk of defaulting), and collect that difference. For ex., I as an bank entrepreneur, can quickly open an online bank, offering 1 year CD at 2.6%, when 1 year Treasury rate is 2.65%. I can collect deposits in billions of dollars (as on 30th Oct, 2018, since there's only 1 bank listed on bankrate.com, that has interest on 1 year CD at more than 2.6%, while treasury is offering 1 year bills at 2.65%. Thus I can raise quick money and make free money on that 0.05% difference. Since all banks offer deposit rates much much lower than Treasury rates, they can make free money by just lending it to the govt. Also, all big banks have trillions of dollars in deposits paying 0.01% interest rate, when treasury rates are > 2.5%. So, the market is highly manipulated by the govt, as such a thing would never happen in a free market. In a free market, most of the banks paying 0% in interest rate would go bankrupt, since deposits would move to banks offering higher interest.

UPDATE June, 2023: Top 4 banks in USA have total deposit of $10T, while treasury rates for 1 year are > 5% per year. These 4 banks are paying 0.01% interest on most of their deposits meaning they are making $500B (5% of $10T) in free money every year by buying govt treasuries with that $10T. This is risk free money, and will continue for big banks. They make tons of free money in all situations => When interest rates are high, they pay nothing and collect interest from treasuries. When interest rates are low, they lend money to people, and then sell those loans to FED assuming no liability on their books. FED takes the loss when interest rates rise, but they can always print money, so it's not really a loss for them. I feel like opening a big bank and becoming a billionaire. So many free billions lying around :)