By Ray Birch
ARLINGTON, Va.—If the recent failure of two banks has made anything clear, it is that regulatory and insurance coverage adjustments may be needed in the age of the “digital run” on financial institutions, says the head of the National Association of State Credit Union Supervisors (NASCUS).
Brian Knight, president and CEO of NASCUS, said the financial services marketplace has been shaken and will no doubt see changes as the result of those bank failures, which demonstrated just how quickly deposits can begin flowing out in a digital environment.
“This isn't It’s A Wonderful Life and people are lining up to get their deposits from George Bailey,” Knight said. “We're in a new age of the digital run on financial institutions, for all intents and purposes. How do we right size and properly calibrate to the extent that changes may or may not be needed?”
The failure of California-based Silicon Valley Bank (SVB), which was a “uniquely postured” depository institution, “rocked the financial world,” according to Knight.
The numbers at SVB are a vivid illustration of the environment, he stated.
“Forty-two billion dollars left the bank on a Thursday, and another $100 billion was scheduled to go the next day. We've never seen anything like that, and that's not what the system was built to accommodate,” Knight said. “In this new digital age, every consumer—from a heavy depositor to a Main Street depositor—with two taps of their phone can move their money out of an institution. I think we're seeing regulatory agencies in our industry now thinking about what does this look like going forward?”
New York-based Signature Bank also failed, but it’s issues were reportedly tied more to crypto investments and holdings.
A Debate Surfaces
Knight said a debate is surfacing.
“We're starting to hear, ‘Does deposit insurance need to reconfigured? And if so, what are we reconfiguring it for?’ Are we reconfiguring it to make sure that all of your deposits are covered now? Does it go from $250,000, to $400,000 or $500,000? But we know that wasn't really the issue at SVB. The issue wasn't so much people’s personal fortunes, it was companies’ payrolls. So, insuring up to $400,000 doesn't solve the issue. Now you're asking do we cover all deposits in an institution? If our concern is not people losing their personal fortunes that were uninsured, it's really companies not having access to payroll, which then flows back down to Main Street...”
‘Walled Off From Contagion’
If there is any good news, Knight believes it’s that credit unions are somewhat “walled off from this contagion.”
“I think there's a bit of a consequential policy debate that is beginning to take root,” he said. “I think the state regulators, like all banking regulators—state and federal—are looking back and trying to assess the lessons learned here. I think it's always important to take a pause when you're assessing the lessons learned. Right? There's the kind of impact of the moment, and then you step back and try to distinguish, from what was just a shocking moment, what are some of the systemic issues we need to address. Obviously, again, one is what should deposit insurance cover.”
Knight pointed out the credit union system doesn't have the exposure that Silicon Valley Bank did.
“I think only 9% of deposits in the credit union system are uninsured,” he noted. “We are looking at a system that very much on the whole is at a retail level with members and depositors who fit neatly within the deposit insurance framework.”
Second Piece of Positive News
There is a second piece of good news for credit unions, as well, according to Knight.
“Credit unions are very well capitalized,” he said. “Credit unions currently have a kind of pure retained earnings capital, as opposed to any kind of tiered capital. I think from a capital level everything looks sound and good. But I do think this causes all regulators to take a step back and look at our traditional interest rate risk and liquidity risk (policies). The federal bank regulators have for years separated the focus on liquidity from the focus on interest rate risk, which was blended under the traditional credit union CAMEL ratings.
“Now, I want to be clear, there were about 20-plus states years ago that moved to CAMELS, like the bank regulators used, to separate liquidity and interest rate risk,” he continued. “But I certainly think as they look at the aftermath of this, and the current events, going forward certainly state regulators are looking at that. They're looking at measuring for interest rate risk. What are we measuring for liquidity risk. We are keeping our eyes on uninsured shares and some of those issues in there.”
A Reality That Can’t Be Ignored
One reality regulators cannot ignore, emphasized Knight, is how the speed of digital banking is changing financial services—for good and bad.
“We are in a digital age—whether it's online rumors sparking a run on a depository institution or just the rapidity with which deposits can leave at an institution,” he said. “How quickly can we address that? What's in place? I think, quite frankly, some of these are policy questions that go beyond any specific regulatory agency and go back to the broader construct of our financial system.”
Brian Knight
Asked if the recent outflow of deposits from smaller institutions to banks is a concern, Knight said state regulators are hearing the opposite from CUs. He said credit unions are seeing an influx of deposits as members seek a trusted financial partner that is focused on Main Street.
He added he is not hearing any concerns from credit unions about their members wanting to withdraw funds.
An Unintentional Issue?
Knight acknowledged he read media articles in March that suggested investors were putting their funds in the very largest banks because the government views them as too big to fail and therefore will backstop any of their problems, as opposed to smaller FIs.
“But I think you now have to ask is the current construct creating, unintentionally, a sense that you are safer with the big girls and boys just because nobody will not let anything happen to them? I think that runs kind of counter to what the system was set up to do,” he said.
NCUA Statement
In response to an inquiry from CUToday.info regarding how the federal regulator has responded to the bank failures, NCUA said in a statement, “Late last year, the NCUA updated its guidance for examiners on how to work with credit unions exposed to market risk. These changes to the supervisory framework for interest rate risk increased clarity and flexibility for both examiners and credit unions. As Chairman Harper has emphasized, credit unions must remain nimble and focused on interest rate, liquidity, cybersecurity, and consumer compliance risks. The credit union system is on solid footing, and overall membership in federally insured credit unions continues to grow.”