This is the third in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. This third article covers mutual banks. The second article covered savings and loan associations. Future articles will cover additional types of banks.
You may have never heard of a mutual bank, but they have a share of the financial institution pie. The first mutual savings bank in the U.S. was chartered in Boston in 1816, According to America’s Mutual Banks, a trade association, today there are 577 mutual banks in nearly every state in the nation and as of December 31, 2010, they had total assets of $209 billion.
Mutual banks come in a variety of flavors, but the most dominant are savings and loan associations and savings banks. How are they different than other banks? "They are owned in a cooperative form. As such, they have no stockholders and are under no stockholder pressure to broaden their margins," explains Doug Faucette, a spokesperson for America’s Mutual Banks.
Mutual banks cannot issue capital stock and as a result must keep an extra capital cushion for a rainy day.
They are member owned, not investors. "Part of your first deposit goes toward purchasing a share in the bank, which because of its ownership structure should be more friendly to its member-owners and surrounding community than an investor-owned bank, with lower interest rates and fees on loans and better deposit rates," says Ed Mierzwinski, consumer program director at U.S. PIRG and the U.S. PIRG Education Fund.
Typically, says Faucette, "They exhibit high capital, community involvement and a very low failure rate in the worst economic times. They offer full FDIC protection. They don’t answer to stockholders, but to a higher authority – their customers and the community – that group is their constituency."
Because they are so community minded, Faucette says they are often referred to as "institutions". "They are not for sale and no one can profit on their membership, other than through the interest on deposits paid to all members. Memberships cannot be bought or sold," he adds.
They have a good track record. According to America’s Mutual Banks, no mutual institutions received any TARP Funds and mutual banks are among the strongest in the country. The average Tier 1 capital ratio (a barometer of capital strength and safety) for all mutual banks was 12.36% and the average risk based capital ratio was 25.30%. The FDIC considers a bank to be "well capitalized" (the highest ratio for safety and soundness), if a bank’s Tier 1 capital ratio is at or above 6%, and its risk-based capital ratio is at or above 10%.
But that’s not to say mutual banks are perfect. Says Mierzwinski, "The biggest problem I am aware of in mutual banks is that on very rare occasions, rogue managers attempt a deceptive conversion to stock ownership, while conveniently lining their pockets by stripping owner equity that has been built up for years by member-owners. (This has occasionally happened with member-owned credit unions, although the conversion process for both is supposedly highly regulated and transparent."
Mostly though, they tend to hold fast to their original intent – to be perpetual institutions serving their communities, with an emphasis on promoting savings and home ownership among its members.