State vs. Federally Chartered Credit Unions: An Overview
In the United States, credit unions are divided into two categories: state-chartered and federally chartered. Though they share many characteristics, requirements, and purposes, the difference in charters impacts the regulation and titling of a given credit union.
State-chartered credit unions fall under the regulatory authority of their respective state's financial services division. Federally chartered credit unions all include the word "federal" in their name and fall under the regulatory authority of the National Credit Union Administration (NCUA).
Key Takeaways
- Credit unions are financial institutions providing banking services created, owned, and operated by their participants.
- Credit unions are not-for-profit enterprises that enjoy tax-exempt status.
- A federal credit union (FCU) is regulated and supervised by the National Credit Union Association (NCUA).
- State credit unions instead adhere to state-specific regulations and guidelines, but not all states have such laws in place.
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State-Chartered Credit Unions
There are some advantages to state charters for credit unions. For one, federal credit unions have maximum interest rate regulations, whereas different states may have higher or no limits on interest rate charges. In addition, state regulatory authorities often have a much greater familiarity with their local credit unions than the NCUA enjoys with federally chartered credit unions.
Not all states charter or regulate credit unions. Arkansas, Delaware, South Dakota, Wyoming, and the District of Columbia do not have state-specific charters, meaning all credit unions within those states' borders must be federally chartered.
Some, though not all, state-chartered credit unions carry deposit insurance that is backed by the full faith and credit of the U.S. government. Some state laws require state-chartered credit unions to be federally insured. The NCUA insures state-chartered credit unions that seek and qualify for federal insurance.
Federally Chartered Credit Unions
Even though they include the word "federal" in their name, federal credit unions (FCUs) are not operated by the federal government. Not only are all of these organizations regulated by the NCUA but they are also insured by the National Credit Union Share Insurance Fund (NCUSIF).
In 1970, Congress established the NCUSIF, which the NCUA manages, to insure member share accounts held at federally insured credit unions. Much like the Federal Deposit Insurance Corporation (FDIC) for banks, the NCUSIF is backed by the full faith and credit of the U.S. government.
The National Credit Union Share Insurance Fund (NCUSIF) protects accounts at federally insured credit unions up to $250,000; the $250,000 coverage applies to each customer (share owner) per insured credit union.
Special Considerations
Credit unions are nonprofit financial savings and lending cooperatives whose members are also part-owners, distinguishing them from true intermediaries like banks. Many credit unions are considered more "community-oriented" and have significantly different operational objectives than other savings and lending institutions.
In the United States, credit unions are not-for-profit, tax-exempt organizations. To maintain their tax-exempt status, they are limited to providing membership to narrowly defined segments of the population (church groups, labor unions, specific occupations, etc.).
However, it is possible for different credit unions to merge and combine their allowable population segments, meaning many credit unions have broad memberships. The board of directors for credit unions is elected by all of its members, and members have votes in the decisions made by their credit unions.
Ultimately, the differences between state and federally chartered credit unions are much less significant than those between credit unions and banks.
Is NCUA as Safe as the FDIC?
The National Credit Union Administration is an independent federal agency like the Federal Deposit Insurance Corporation, both of which insure up to $250,000 in deposits per institution.
What Does It Mean to Be a Federally Charted Credit Union?
A credit union granted a charter from the federal government is a federally chartered credit union, giving it the right to operate as a credit union.
Are Credit Unions Safer Than Banks During a Recession?
While credit unions are rumored to be safer than banks during recessions, they are subject to the same economic factors as banks. However, a credit union's safety ultimately depends on the risks it takes with deposits and funds. Credit unions generally don't engage in the same investing and money-making endeavors as banks, but if one engages in risky investments, it is more likely to fail than one that doesn't.
The Bottom Line
A state chartered credit union has a charter granted by a state. These credit unions follow state regulations. A federally charted credit union has a charter from the federal government granting it the ability to operate. Federally charted credit unions follow federal regulations, sometimes more strict than state regulations.
Some states do not grant credit union charters, so there may not be state charted credit unions in certain states. If this is the case, credit unions must be federally chartered.
