NEW CASTLE, N.H.–NCUA Chairman Todd Harper offered his thoughts on trends in liquidity, CUs setting themselves up for trouble by continuing to make rock-bottom-rate auto loans, and why a Silicon Valley Bank-like failure is unlikely in credit unions during a Q&A session here.
During the Cooperative Credit Union Association’s CU Accelerate meeting Harper responded to questions from CCUA CEO Ron McLean. Here is a look at what was discussed:
McClean: How safe and sound are America’s credit unions?
Harper: I like to think of it this way. At Signature Valley Bank, 91% of deposits were uninsured. In credit unions, we are the converse--90% of deposits are insured. So, the money is not at risk and the concern over consumers withdrawing their money isn’t as heightened.
We have also strengthened our rules. The liquidity rule comes to mind. Credit unions over $250 million must have access to the CLF or the Federal Reserve to backstop that liquidity.
McLean: We asked our (CCUA) members in four states about their biggest challenges, and liquidity and interest rate risk come to mind. What trends are you seeing, and how should credit unions respond?
Harper: There is a certain amount of unrealized losses that are occurring when certain assets are sold. Overall, we've seen approximately 8.5% of the industry’s investments are unrealized losses at this point in time. That's a pretty manageable number overall.
Generally, we see the credit union position as fairly strong overall. That's not to say we're out of the woods yet. We have a number of institutions, including those that have more than a billion-dollars in assets, which could cause greater risk to the share insurance fund. Some of those credit unions were out there with an originate-to-sell model for loans and that worked really great in a low interest rate environment.
All of a sudden, as the Fed raises interest rates, they have had to get those loans off their books. So, they have unrealized losses sitting on the books, which is taking away the money that could be available for cash and short-term investments. Some of those credit unions decided to keep on going.
If I can emphasize anything, this is a great time for credit unions to take a look at their policies and risk management policies and procedures to see if they need to be updated. The time to address a crisis is not when the pipes freeze.
McLean: What are you seeing with the stress tests?
Harper: All credit unions are experiencing heightened interest rate risk. As I talk to examiners one of the things I picked up was examiners are still finding some credit unions making loans at 1.99%. For those who have been around an interest rate cycle for the long term, you know that’s going to affect you for the long term and play out in many ways.
On NEV guidance, it was time for us to update it. We moved to a more principles-based set of procedures. A credit union might have high interest rate risk, but that’s not necessarily a problem as long as they have a strong policy behind it and they are managing it.
McLean: What about NCUA and vendor oversight authority?
Harper: Let me be very clear: Congress would have to pass this. Second, NCUA would have to develop a policy and a set of procedures. I have heard people say if NCUA gets this authority, ‘They are going to come in and look at our HR back office CUSO or our janitorial staff…’ Those are red herrings. The areas where I see risk as being highest are loan underwriting at credit unions and CUSOs, the need to be sure of safety and soundness, consumer protection, BSA and AML compliance, and cybersecurity. With cybersecurity, there are some national concerns. I don’t want credit unions to be the way in which somehow a bug comes into the system through a vendor and it spreads.
The Last, But Important Thing
The last thing, and I think this is most important: Small CUs are at a disadvantage. They have many disadvantages. One of them is they don’t have the resources to do all the due diligence they want to. If we had vendor authority, we could provide an exam report on that vendor to that credit union. That would provide a measure of regulatory relief to those credit unions.
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