By Ray Birch
ALPHARETTA, Ga.–Could the current rising interest rate environment—combined with the new emphasis on digital banking—pose a threat to credit unions similar to one of the market conditions that helped to bring down the savings and loan industry?
One expert believes that any credit union dismissing that possibility is ignoring a big, potential problem.
Robert Colvin, president and chief strategist at CU Capital Market Solutions, told CUToday.info the primary interest rate risk facing credit unions lies in funds supporting long-term, fixed-rate assets.
“If there is an instrument that all of a sudden starts to siphon off a portion of the deposits of all depositories—like when money market accounts were created and brought down the S&L industry—if there is this disruptive event…Any credit union that ignores this possibility is sticking its head in the sand,” said Colvin.
Colvin recalled how the S&L industry in the late 1970s faced a situation similar to one of the scenarios credit unions are looking at today, with substantial funds in liquid deposits. The first Money Market fund was created by Vanguard in 1976. Money Market Accounts (MMAs) made their debut in late 1982 following passage of the Garn-St. Germain Depository Institutions Act.
Financial institutions themselves had already become deregulated with the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980.
Robert Colvin
The new MMAs offered attractive rates and funds were soon flowing out of savings and loans and other financial institutions, forcing the institutions to turn to much more expensive funding sources or to increase their own rates.
“That brought down the S&L industry,” said Colvin.
What the Call Reports Show
Today, Colvin said the problem facing credit unions is that as mortgages and other long-term assets have grown by over 82% since year-end 2017—$703.9 billion vs. $385.8 billion—long-term member shares and deposits have declined by 34%—$28.1 billion vs. $42.5 billion.
According to an analysis by CU Capital Market Solutions, data from NCUA’s year-end Call Reports show:
- At year-end 2021, 93.3% of member shares and deposits matured or re-priced < 1-year, up from 89.0% at year-end 2017
- Member deposits (CDs) > 3-yrs., comprised only 1.6% of total shares & deposits at year-end 2021
- Long-term assets (generally defined by the NCUA as loans > 5yrs and investments > 3yrs) increased to $703.9 billion (34.16% of assets) at year-end 2021
“The result is more interest rate risk in the system,” Colvin said. “The first issue, which is the most pressing, is the interest rate risk. You're writing more and more longer-term assets and virtually all the lending in the credit union space is fixed rate.”
An Additional Concern
But what further concerns Colvin is that the savings and loan crisis, which primarily took place from 1986-1995, when 1,043 out of the 3,234 savings and loan associations in the U.S. failed, today’s consumers have embraced digital banking and can move their much more quickly than heading to the local branch to make a withdrawal.
“I think you have got to be mindful of what's going on, the bigger picture—that all depositories may see some deposit decline because of technology and innovation,” stated Colvin. “Remember, these are not maturity deposits we are concerned about, and they could walk out the door very fast. There is a lot of money in non-maturity deposits, in part due to the government stimulus funds.”
Consumers have been reluctant to go out and extend maturities because rates have been extremely low, reminded Colvin.
‘Caught in this Situation’
“And everybody's now been caught in this situation,” he said. “Rates are rising now, and you lay on top of that technology—and all the talk about digital currency. (Treasury Secretary) Janet Yellen has been talking about this, digital currency and technology. All this is bringing less reliance on traditional financial institutions.”
If a “disruptive event” were to happen, such as the introduction of a new type of savings tool—as occurred with money market funds—traditional financial institutions could find themselves having to turn to more expensive funding sources and already tight net interest margins would get much narrower, Colvin said.
“The last time there was really a disruptive event that changed the course of the financial services industry was when money market instruments were introduced in late '70s and early '80s that basically brought the S&L industry down,” reiterated Colvin. “You basically had an industry that was funded with very short funds. No one thought that people would put money in a money market fund that was uninsured, but they did.”
New Program Developed
Seeking to respond to the challenge, CU Capital Market Solutions (CMS) said it has developed a new capital markets funding program that works to help credit unions raise long-term “member" funding.
The program enables participating credit unions to raise up to $10 million in member deposits in a single funding through the sale of non-redeemable share certificates (CDs). The purchased CDs will be pledged as collateral to secure notes sold in the capital markets.
The program is initially expected to raise funds on a quarterly basis and purchase CDs with a five-year maturity.
Colvin said the certificate rate is expected to be competitive with FHLB rates for similar-term advances.
The company said it has spent two years developing the program and will need a minimum of 100 CUs to launch.
“What we have done is create a bridge for credit unions to reach capital market funds,” stated Colvin.
For info: www.cucapitalmarketsolutions.com