The failures of Silicon Valley Bank
(SVB) and Signature Bank, combined with the FDIC’s decision to cover all
depositors could have an impact on credit unions. With over 93% of their
deposits uninsured, SVB appears to be the poster child for poor strategic
planning. The bank got caught short when the Fed raised rates. For credit
unions, the real story is the decision to cover ALL accounts regardless of the
amount in the account.
Where is the threat to credit
unions? Credit unions had no role in the failures of SVB and Signature Bank.
The threat lies in the Treasury and FDIC’s decision to guarantee the funds in
every account…no matter how much was in that account. While the Treasury
Secretary and FDIC Chairman Gruenberg may have felt the need to do so to
restore confidence, this action just kicks the can down the road. And the road
will have no end if NCUA feels the pressure to do the same thing if a similar
situation hits the credit union movement. Should there be a conservatorship or
liquidation of a credit union with a significant amount of uninsured shares,
will NCUA agree to cover all deposits and investments on account at the credit
union?
This solution only covers up the
problem while creating a bigger problem later. Going beyond the $250,000
deposit insurance limit invites moral hazard. Moral hazard exists when there is
no incentive to guard against risk. This creates an atmosphere where decisions
trend toward the riskier and selfish side. For many, the term “moral hazard”
first came into play during the S&L Crisis of the 1980’s. The genesis of
the S&L crisis much like the issues that confronted SVB, was fueled by an
upwardly moving interest rate environment combined with an asset/liability
mismatch. The SVB situation is eerily similar -- the Fed raised rates leading
to a decrease in value of the US Treasuries and mortgage-backed securities that
SVB had already purchased.
The FDIC has stated that
guaranteeing all accounts at SVB and Signature is not a government bailout. But
that begs the question, “who is paying for it?” The answer is simple – other
banks, and by extension, their customers. Were NCUA to employ the same
strategy, all other credit unions would be on the hook for the losses. So, even
though credit unions were not a party to the situation, they could be affected
if NCUA decides to insure all accounts in a future loss.
The good news is that the chances
of such a situation happening to credit unions is much more reduced due to the
cooperative nature of credit unions. While depositors with accounts in SVB
won’t lose any of their deposits, some parties did lose money in the failure.
These losers include institutional investors that lost big – Vanguard Group
(lost $1.7 billion), State Street Global Advisors ($824 million), BlackRock
Fund Advisors ($819 million) and JP Morgan Investors ($581 million). As credit
unions are member-owned, the pressure of increased earnings for the benefit of
stockholders is non-existent.
Credit unions also have a secret
weapon that banks don’t. In 32 states and DC, credit unions can opt for excess
coverage provided by ESI, a subsidiary of American Share Insurance. This allows
credit unions to provide and promote additional coverage, in some cases up to
$5 million in excess coverage.
Geoff Bacino
Partner
Bacino & Associates
1434 Duke St., Suite 200 | Alexandria, VA 22314
Geoff@BacinoAssociates.com |
202.549.0253 Direct | 703.348.7602 fax
Comments
Post a Comment
Please no profanity or political comments.