NAFCU: Credit Unions Lend Stability as Bank Stocks Stumble

Economist says credit unions are providing an increasingly important role of bolstering “resilience” in the nation’s financial system.

By Jim DuPlessis | May 12, 2023 at 12:19 PM

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Some regional bank stocks have plummeted in the last two months amid fears of deposit runs and short-selling of their stocks – despite many of those banks releasing data showing their deposits are holding.

The trend led the American Bankers Association last week to call on the Securities & Exchange Commission to investigate and take “appropriate enforcement actions against market manipulation and other abusive short selling practices.”

Curt Long

In an interview with CU Times Monday, NAFCU Chief Economist Curt Long said the turbulence shows credit unions fulfill an increasingly significant role as a stabilizing force among financial institutions.

“It highlights the value credit unions play in terms of adding some resilience to the larger sector,” Long said. “Credit unions have not been subject to these swings that we’re seeing in regional banks.”

ABA President/CEO Rob Nichols wrote a May 4 letter to the SEC, calling on it to investigate short selling of bank stocks that seems unmoored from the condition of the bank or the industry.

“Indeed, short sales have followed relatively favorable earnings reports from some of the banks in question and from peer institutions,” Nichols wrote. “We have also observed extensive social media engagement about the health of various banks and the sector generally that appears disconnected from the underlying financial realities.”

Rob Nichols

Nichols said short selling can be a legitimate and useful financial tool. “ABA is, however, unalterably opposed to short selling practices that distort the markets through manipulation and abuse.”

NAFCU’s Long said credit unions have been more stable this spring than banks in part because they have few accounts that exceed the NCUA’s $250,000 threshold for insurance and no exposure to the stock market.

“When financial challenges arise, banks are getting hit through their stock price in a way that credit unions are not,” he said. “From a policy perspective, I think that’s exactly what you want. You want credit unions there to help to sort of buoy the system, to act as counter-cyclical balance where credit unions are going to be there providing credit to Main Street America, where banks more subject to the business cycle are going to reign in credit at the worst possible time.”

Economists have been looking to see to what extent the bank failures will have on credit availability.

The Fed’s quarterly survey of bank loan officers released Monday showed most of the 84 banks responding said they tightened lending standards for credit card, auto and other consumer loans, and they widely reported that they expect to continue tightening for the rest of the year.

The survey was conducted March 27 to April 7, when two of three bank failures so far this year had occurred and the third was dangling by a thread.

Among the largest banks – those with more than $250 billion in assets – most said important reasons why they expect to tighten standards for the rest of the year were “deterioration in credit quality, deterioration in collateral values and reduction in risk tolerance.”

Long’s eye was caught by the next passage in the survey summary. It said that most banks with less than $250 billion in assets cited those same reasons as the largest banks, but the majority of smaller banks also cited “concerns about their banks’ funding costs, banks’ liquidity position and deposit outflows.”

Long recalled that credit unions picked up significant market share in lending in the aftermath of the financial crisis of 2007 that triggered the Great Recession.

“It’s sort of the same pattern playing out where banks under stress are tightening their loan standards, becoming a lot more cautious on extended credit,” Long said.

And because credit unions don’t have to change course every time the stock market flinches, credit unions are “able to provide credit in those challenging periods.”