Distinguishing Differences in Financial Institutions: Ever wondered how a big bank differs from a credit union? Here's how.

• Author: Barbour, Tracy
• Position: FINANCE

There are thousands of financial institutions in Alaska, providing everything from checking and savings accounts to loans and investment solutions.

Banks and credit unions are among the most prominent financial services companies serving Alaskans. However, there are distinct differences--and similarities--between how these institutions function to meet the needs of businesses and consumers. And each one fills a particular role in the financial services marketplace.

The state's diverse roster of financial institutions also includes specialized entities: trust companies, finance companies, money service businesses, mortgage lenders/loan originators, and payday lenders. All of these institutions give Alaskans more choices when it comes to satisfying their financial requirements.

Regulatory Primer

As a brief regulatory overview, the United States has a dual banking system that allows financial institutions to choose a state or national charter, which, in turn, determines how they are governed and function. The federal Office of the Comptroller of the Currency (OCC) oversees banks that operate nationally, and the Federal Reserve regulates most state banks. The National Credit Union Administration (NCUA) regulates, charters, and supervises federal credit unions.

And as an area of dissimilarity, deposits at banks and credit unions are insured by different regulatory bodies. The Federal Deposit Insurance Corporation (FDIC) provides insurance for individual bank deposits up to $250,000 while the NCUA provides insurance up to $250,000 per share deposit for credit unions.

Within Alaska, the Alaska Division of Banking and Securities regulates many of the financial institutions that operate in the state. The division charters and examines state-chartered banks, bank holding companies, credit unions, trust companies, small loan companies, business and industrial development corporations (BIDCOs), payday lenders, and premium finance companies. More specifically, it regulates four banks--Northrim Bank, First Bank, Denali State Bank, and Mt. McKinley Bank--and one credit union: Credit Union 1.

Banks and credit unions that are chartered in Alaska must adhere to distinct statutes, according to Patrice Walsh, director of the Alaska Division of Banking and Securities. Banks must follow AS 06.05. Alaska Banking Code. Credit unions are bound by AS 06.45. Alaska Credit Union Act. And both banks and credit unions must follow AS 06.01. Banks and Financial Institutions. "The credit union is a nonprofit and the banks are privately-owned corporations, so there are slightly different guidelines," Walsh says.

The ownership structure is one of the key differences between the two types of institutions. Banks are private businesses owned by a few individuals or entities, and credit unions are nonprofit cooperatives owned by all of their customers--referred to as "members." As not-for-profit cooperatives, credit unions are exempt from federal income at the entity level while banks generally pay taxes at the corporate level. The tax exemption is designed to support credit unions in their original mission to give people with a "common bond" and modest means affordable access to banking services.

Bank Attributes

Many people are confused about the differences between banks and credit unions. The distinction between these entities' is typically not visible to most people as the difference is related more to how the institutions are run versus the functions they perform...