By Ray Birch
BIRMINGHAM, Ala.—It may be time more credit unions consider deposit participation programs as a means to ward off some of the negative economic effects of the pandemic, suggests Dennis Dollar.
The former NCUA chairman asserts that just as CUs manage their balance sheet through loan participations, more need to do the same with savings participations.
The big reason: The pandemic is hurting credit union net worth ratios several ways. First, as CUs face a difficult time coping with the pandemic and serving their members—many losing money as they sacrifice fees and defer loans—they are dipping into capital to keep their CUs operating rather than making deep cuts, such as to staff.
At the same time, credit unions are seeing deposit inflows in a flight to safety, as well as from government stimulus. The result: Credit unions are increasingly flush with deposits.
Capital Ratios to Take Hit
“Capital ratios are going to be impacted by the flight-to-safety deposits, coupled with tighter margins, reduced loan demand and higher provision for loan loss expenses,” explained Dollar, the former NCUA chairman and now principal of Dollar Associates, during a webinar on balance sheet management hosted by the company. “The ability to manage the balance sheet with a deposit-participation program, similar to how credit unions manage their loan-to-share ratio and liquidity through loan participations, is a strategic option worth consideration.”
Dollar said his company is working with a number of credit union clients using deposit-participation-type arrangements.
“And they have benefitted from it, as have their members, with expanded federal insurance coverage,” he said. “It’s an interesting strategic concept.”
Two Questions
Expanded insurance coverage is important today, emphasized Dollar. He cautioned that some large depositors bringing money to CUs now above the $250,000-per-account limit for NCUSIF coverage could at some point move all of their funds if they are unable to stay beneath the coverage cap.
“So, how can we enhance insurance for some of the larger depositors?” asked Dollar. “How can we take some of these deposits off our balance sheet by partnering with other credit unions on deposit participations?”
The answers, said Dollar, can be found at a number of credit unions across the country that have arranged deposit participations with other CUs, working the deals on their own. During the Dollar Associates webinar, Tom Nelson, EVP and chief investment officer at New York-based investment firm Reich and Tang, said his organization offers a program that allows credit unions to offload excess deposits and keep members happy.
“For larger members who need peace of mind, this provides them with deposit insurance coverage from strong banks and credit unions across the country,” Nelson said. “We help credit unions help their members by offering extended FDIC/NCUA insurance on their deposits.”
10-Basis-Point Premium
Dennis Dollar
According to Nelson, the excess deposits at CUs are invested in well-capitalized banks and credit unions backed by their respective federal deposit insurance programs.
“The deposits are insured and receive a 10 basis-point premium to what is offered at the Fed,” said Nelson.
The dollars are distributed so they do not exceed insured limits. The money is matched to the same type of liquid account, either savings or checking or money market, from which it was removed. Nelson said members do not interact with Reich and Tang, nor with financial institutions outside their primary credit union holding their dollars. He emphasized the credit union maintains the one-to one relationship with the member.
“Most important,” said Nelson, “is these funds can be recalled immediately by the credit union, and they come right back on the balance sheet, if that’s what the credit union wants.”
Strategy for Maintaining Interchange
Dollar said one reason a credit union might want to participate in deposit participations would be to stay beneath the $10-billion in assets threshold at which additional regulatory scrutiny from the CFPB kicks in, as do Durbin Amendment rules that lead to a reduction in interchange revenue.
Dollar emphasized a credit union must be operationally ready and fully prepared to exceed the $10-billion threshold, and not get caught flat-footed as the result of unexpected deposit inflows.
“If a credit union can offload deposits through participations to keep its assets below the $10-billion mark, it can then bring them all back when it is ready to cross that threshold,” Dollar said.