Forum Post: Common Good Bank system

Common Good Bank Community Divisions 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, democratic financial institutions? And how is the Common Good Bank model any different than a credit union in the first place? The short answer is that banks can do more than credit unions. By combining the community spirit of a credit union with the power and growth potential of a stock-based bank, Common Good Bank can do far more than either a bank or credit union can do alone.

Greater democracy is at the center of this greater power. Like most democratic systems, credit unions and mutual banks are representative democracies. So you only get to elect the people who make the decisions -- you never get to participate in any interesting decisions yourself. In particular, you don't get to decide what the bank should invest in or where the profits will go.

Mostly this is because of the way credit unions and mutual banks are regulated. Business lending is severely limited or even prohibited for most credit unions. And both credit unions and mutual banks 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 7-8%.

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). In the view of the regulators, it has barely adequate capital. Now let's say the credit union wants to expand by 10%, accepting another $10 million in deposits. It cannot do this until it has earned $800,000 more (or received a grant for that much), after all the costs of doing business. The credit union cannot give those profits to worthy causes; it must hold onto them indefinitely.

Now look at a similar situation in the Common Good Bank model. Say the bank has sold $8 million in stock and has $100 million in deposits. In the view of the regulators, the bank has adequate capital. Now if the bank wants to expand by 10%, all it has to do is sell another $800,000 in stock. Typically, Common Good Bank depositors themselves will buy that much stock. Meanwhile, any profits made by the bank (about $1 million a year in this example -- the same amount of profit as a credit union would make) can be given to food pantries, public education, or whatever the members decide. So the bank can grow much more quickly and give much more to the community than a credit union can.

In spirit and in effect, a Common Good Bank is a credit union organized as a stock bank, in order to advance the greater good more effectively.