Credit UnionFIN5503CH - Assignment for Course FIN 5503...

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Assignment for Course: FIN 5503 Title of Assignment: Credit unions: The Future of the Cooperative Financial Institution CASE QUESTIONS The difference in risk profiles between banking and credit unions? How does banks in comparison to credit unions score a higher ROA? Why are some of the arguments against it or for it as to why credit unions should be tax exempt? How can the increase of memberships benefit or be a disadvantage to the credit union? Which associations influenced credit unions the most? And why? Was it feasible to make recommendations that would be acceptable to both banks and credit unions?
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Before submerging into the differences in the risk levels between banks and credit unions, you must understand why both exist. Credit Unions were established for the purpose of promoting long term capital growth for its member in non-suburban areas, people whom may not have access to larger financial institutions. Those who contribute their deposits into accounts held at credit unions become members of the institution. These institutions are nonprofit and tax exempt, which enhances their purpose of acting on the behalf of its members and not for profit maximization. The members of credit unions are the benefactors, and are rewarded with lower- than-the-market interest rates and increased savings interest rates. This is achieved through credit unions by not chasing increased earnings and higher share prices, but competitive rates throughout. The business model completely differs from for-profit businesses for those reasons. On the contrary, banks are conducted for one sole reason and that is to maximize shareholder and investor value. The depositor within banks are considered customers, as oppose to members of a credit union, because they contribute to the income and profit for the bank. A perfect case scenario is Wells Fargo, a leader in the financial industry, in 2010 the bank internally 1
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restructured their organizational model after acquiring Wachovia Bank and one facet was to refer to their financial centers as stores not branches. This seemingly minor detail helped change the mindset of their employees, in that the bank depositors are customers who are coming into the store and must be sold products and services. Banks have to conduct business for the purpose of profitability otherwise investors will shy away from investments within the institution. Many banks, to maximize profits, engage in various lines of business in hope of acquiring large market shares. This puts the pressure on big banks to engage in risky investments in pursuit of higher returns. For example, the financial crisis in 2008, in large parts caused many banks to fail due to chasing higher returns. The banks made investments in mortgage backed securities that included very risky mortgages, and once the “bubble burst” these institutions suffered immensely.
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