A mutual bank, also known as a mutual savings bank, is a chartered financial institution owned by its member depositors, somewhat similar to a credit union. A mutual bank is a lending and depository institution that provides interest to its depositors, as well as issuing mortgage, car, personal and other conventional loans to its members.
Mutual banks first originated in the early 1800s, more as a philanthropic effort, as opposed to a for-profit enterprise. They initially catered to the working class, assisting in the creation of savings accounts for its members.
The mutual bank would accept a deposit from a member and pay a predetermined amount in the form of interest on their deposited funds. To generate revenue (to pay those savings account interests), mutual banks would then use those deposited funds to make loans to other members – at a slightly higher interest rate. Profits from the mutual bank are used to help keep borrowing costs lower to its members, as well as providing competitive returns on their savings.
Mutual banks tend to be smaller, community banks, in contrast to regional or national banks chartered by state or national regulatory agencies. They are sometimes compared to credit unions. Mutual banks are also characterized by a lack of central ownership and are without equity, or stockholders. Each member of a mutual bank owns a percentage of the institution and is granted all the rights of membership while a depositor with that mutual bank. When a member withdraws and closes the mutual bank account, membership is terminated.
Mutual banks encourage their members to save and invest their funds for the future. Most mutual banks typically prefer to make conservative investments, with a goal of providing consistent returns to their depositors (mutual bank members). Consequently, most mutual banks follow the lead of other conservative banks by staying away from high-risk loans and investments.
The term “mutual” highlights the mutual benefits the bank and its members enjoy. A mutual bank may at any time convert its status from a membership-based institution to a publicly traded entity based upon the decisions of the mutual bank’s governing board. And many mutual banks have taken that step.
While there are fewer mutual banks in existence today compared to other state and federally chartered financial institutions, a mutual bank has at its core their members. Mutual banks are established to direct all their efforts for the mutual benefit of the institution as well as its depositors and offer a competitive alternative for those seeking a new banking relationship.
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