Why a bank? Why not a common good credit union?
Common good banks are designed to be not-for-profit, community-spirited businesses. So why not organize them as credit unions, an already-existing legal structure for tax-exempt nonprofit financial institutions? The short answer is that banks can do more than credit unions. Besides, credit unions are regulated in a way that prevents them from giving away very much of their profits and prevents them from growing quickly. Here’s how it works: All banks and credit unions are required to maintain adequate capital. For stock-based banks, of course, capital means stock. For credit unions and mutual banks, adequate capital means retaining enough profits so that the ratio of net worth to deposits is at least 8%. For example, let’s say a credit union has assets of $108 million – $8 million above and beyond the $100 million that it has borrowed from the depositors (as deposits). It has, in the view of the regulators, barely adequate capital. Now let’s say the credit union wants to expand by 10%,
