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  CDs and Investing Basics   Chapter 6: Banking institutions
Banks, thrifts and credit unions: Here's some advice for deciding where to park your cash.
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Types of banking institutions


Do you do your saving at a bank, a savings and loan, or a credit union? Is it a national bank or state-chartered? It can be confusing, but we can help you better understand the country's banking institutions.

To begin, the Federal Reserve is the United States' central bank. It controls the flow of money in and out of banks and maintains the stability of the financial system. All national banks must be members of the Federal Reserve. Membership is optional for state banks.

Commercial banks have traditionally been the largest source of loans to small businesses. They also make consumer loans, including mortgages, and offer credit cards, deposit products and checking accounts for everyone.

Thanks to deregulation, banks can offer insurance and investment products such as mutual funds and IRAs. Many banks also offer trust services, estate planning and asset management.

Banks vary in size from megabanks with hundreds of branches nationwide to small community banks that specialize in serving the needs of the local clientele. Many banks are publicly held corporations. Their principal goal is to make money for their stockholders.

National banks are chartered, regulated and supervised by the Office of the Comptroller of the Currency; headquartered in Washington, D.C. National banks have "National" or "N.A." in their name.

State banks are chartered, regulated and supervised by their state's banking division. The Federal Deposit Insurance Corp., is the federal regulator of state-chartered banks that don't belong to the Federal Reserve System.

Thrifts have come a long way from the days when they only offered savings accounts and mortgages. Today's thrifts offer checking accounts and provide business and consumer loans as well as mortgages.

Thrifts can be owned by their shareholders (stock ownership) or by their depositors (mutual ownership). They can be either federal or state chartered.

While there are some differences between savings banks and savings and loan associations in terms of how they are set up, Congress has removed all differences between the federally chartered facilities as to the kinds of loans and investments they can make.

The Office of Thrift Supervision is the primary regulator of all federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations.

Credit unions
Credit unions are nonprofit, cooperative financial institutions. Traditionally, people with a common bond have formed them -- they work in the same industry or are members of a particular workers' union, share the same religion, etc. Today, the membership restrictions have softened significantly. Many credit unions simply require that you live or work in a certain geographic area in order to become a member.

The vast majority of credit unions in the United States are federally chartered or state chartered credit unions that are federally insured.

Credit unions frequently offer higher interest on deposit products than banks or thrifts; and they have a tendency to offer loans at lower rates. Credit unions are exempt from federal taxation.

The National Credit Union Administration is the federal agency that charters and supervises federal credit unions and insures deposits in federal credit unions and state credit unions that are federally insured. Deposits of member institutions are insured up to $100,000 per customer (individual or business.)

Online banks
Online banks, which usually have no brick and mortar branches, first gained attention by offering higher rates on deposit products than traditional banks. While that is still true to some extent, the rate differences are not as significant as in the past.

Most bank Web sites have an "About Us" page that describes the institution. Look for information regarding the official name, their charter, address of the bank's headquarters and information about its insurance coverage from the FDIC.

The FDIC warns that not all banks operating on the Internet are insured by the FDIC. Many banks that are not FDIC-insured are chartered overseas. If you choose to use a bank chartered overseas, it's important to know that the FDIC may not insure your deposits. Check with your bank or the FDIC if you're not certain.

-- Posted: May 1, 2006
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