MADISON, Wis.–Loan growth at credit unions slowed modestly in January when compared with January of 2022, with savings also slowing during the month. The result was “modestly tighter” liquidity, according to CUNA chief economist.
Mike Schenk, speaking to the media ahead of the release of CUNA’s Monthly Estimates data later this week, said overall credit unions showed pretty strong earnings in the year’s first month.
But Schenk also flagged an issue that has been cited by NCUA, among others, and that is increases in delinquencies in certain categories.
“There was a softening of the delinquency rate and the net charge-off rate, with both going up modestly,” said Schenk. “Compared to a year ago the delinquency rate is 13 basis points higher at .55%, but that also means 99% of CU loans are paying on time. It’s up a bit against the cyclical low reported in March of 2022, which was an all-time low. Today’s 55 basis points is actually about 10 basis points lower than pre-COVID levels. The levels remain low.”
In separate reporting on CUToday.info, Schenk addressed any similarities between credit union investment portfolios and those of the two banks that have failed in the last week.
Credit Unions Compared to the Failed SVB
Separately, when asked for any vulnerabilities credit unions might have with available-for-sale securities in their investment portfolios that are similar to those held by the failed Silicon Valley Bank, Schenk said, “I don’t think the vulnerabilities are that great. The capital ratio at credit unions, which would account for any unrealized losses, is 9.2%. That’s about two percentage points lower than prepandemic, but really a solid reading overall relative to the 7% standard regulators deem to be well-capitalized. So, it’s a pretty significant capital buffer. We have begun analysis of individual institutions on unrealized losses and it appears pretty low. We don’t see any outsize exposure to unrealized losses.”
Concentration Risk
Schenk noted Silicon Valley Bank had an unusual amount of concentration risk in industries that were vulnerable, primarily start-up tech firms.
“Second, the collateral was kind of sketchy,” Schenk said. “Many of the loans made were backed by bonds issued by start-up companies. Third, one of the defining characteristics of that situation is they had this significant investment in long-term bonds, which generally speaking would not be a big deal if held to maturity. But the real problem is that one institution in particular seemed to have a very large amount of uninsured deposits. Over half of deposits were uninsured. That essentially is what caused the run and created the issue, and not just for that bank but for banks that had an association with Silicon Valley Bank.”
Schenk said approximately 8% of deposits in credit unions exceed the NCUSIF’s $250,000-per-account insurance limit and are uninsured.
The Hunt for Yield
“With rates close to zero, financial institutions have been searching for yield, so they went out a little longer than they typically would. Usually, that’s not that big of a deal,” said Schenk. “But in rising rate environment, those investments were losing value. That’s unusually manageable, but when you have that level of uninsured deposits it’s what happens when you are forced to liquidate at a loss.”
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