The impact of recent bank failures could impact credit unions.

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