By James Collins
Wait, who are we behind?
Since January, banks have reported the largest increase in deposits in history – rising more than 30% annualized, according to an article published at depositaccounts.com. Second quarter data for credit unions indicate that many have exceeded even this incredible level of growth.
Coupled with increased expenses due to COVID and skinnier margins, net worth is bound to tumble.
While actual damage will vary, one could estimate that many credit unions are in danger of losing about one percentage point or more of their net worth. And this assumes no new COVID relief packages pass Congress. If that happens, many credit unions would feel the impact as their net worth craters below 7% and, gulp, even below Prompt Corrective Action territory at 6%.
Can you spell Prompt Corrective Action?
Did No One Think of This?
Hang on. Didn’t regulators think of this? After all, they have reduced net worth requirements by one percentage point. They also created a “safe harbor” of sorts by allowing institutions that keep these potentially flighty deposits with the Federal Reserve not to count them as assets in the calculation of net worth. This last issue is particularly noteworthy, as many institutions are sitting on huge balances at the Federal Reserve earning virtually zero.
From a regulatory standpoint, it makes great sense. After all, no regulator would want a financial institution to suddenly feel the need to go out and take these excess short-term deposits that are earning nothing and invest them into longer term risky investments in a quest to increase their income and salvage their net worth. This behavior could increase risk dramatically: (a) increased interest rate risk and (b) a potential liquidity issue in case these excess deposits disappear faster than a prom dress after midnight.
Crisis averted? Yep.
Oh, Never mind. That was the FDIC, not the NCUA.
The FDIC did both of those things to protect primarily the smaller community banks. The NCUA, other than some directives about easing the paperwork for some credit unions in Prompt Corrective Action, has not.
Agency is Hamstrung
In their defense, NCUA is caught by the “legislative hamstring” on this. The FDIC has statutory authority to risk-rate Federal Reserve deposits at zero, and by doing so eliminated the incentive to take risks with the deposits. They also used their strong legislative muscle in the CARES Act to lower, temporarily, their capital thresholds as well. The NCUA lacks this ability.
It is time we ask our legislators and the NCUA to do the same for the credit union industry that the FDIC did for community banks. It is not an issue of fairness, but rather, the collateral damage of having thousands of credit unions sharply reduce their efforts to help their members through these challenging times. While Congress debates the next COVID bill, our input to both regulators and legislators can help them make good decisions in the best interest of both our members and our communities. In addition, common ground between banks and credit unions on the looming CECL regulations could be combined. As with the FDIC, these changes should be temporary.
Hard to Say This, But…
COVID has dramatically changed the balance sheets of many credit unions, reducing net worth for many institutions. This seeming increase in risk is somewhat of a mirage, as many of us are now keeping large balances with corporates or the Fed. Regulatory constructs tjat work well in a normal environment are leading to unintended consequences.
It is hard for a credit union CEO to say this, but it’s time we follow the FDIC.
James Collins is the CEO of O Bee Credit Union in Lacey, Wash. He has also been regular credit union writer, appearing in several industry and other publications since 2003.
He also volunteers as a Search and Rescue K9 Handler, working to find lost and missing people since 2008.