How Safe Are Credit Unions Amid Bank Turmoil?
Written by Breck Dumas
The failure of Silicon Valley Bank (SVB) and other institutions in recent weeks sparked fear that contagion could catch on, leading many depositors to move their funds to major banks for safety.
However, two regulatory experts say credit unions are actually safer places for folks to put their money than traditional banks, pointing to how the institutions – which largely cater to individuals rather than companies – are much less vulnerable to bank runs or liquidity issues.
Credit unions – which are owned by their members – have their own regulator, the National Credit Union Administration (NCUA), which is very much like the Federal Deposit Insurance Corporation (FDIC) that regulates banks. The NCUA insures depositors' funds up to the same threshold as the FDIC, $250,000.
Just like banks, deposits above the $250,000 mark at credit unions are uninsured, but unlike banks, credit unions do not have the same level of risk exposure to the factors that took down SVB and other troubled lenders.
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Mark Treichel, who spent 33 years at the NCUA and served as executive director of the agency, points out the recent bank runs have been driven by uninsured deposits, and it is "substantially less likely" for that to happen to a credit union.
Treichel, who now assists credit unions with the NCUA via his company, Credit Union Exam Solutions, points out that the banks that have failed recently – namely SVB, Signature and Silvergate – all held a large percentage of uninsured deposits, with SVB's uninsured deposits upwards of a whopping 90%.
A worker, middle, tells people that the Silicon Valley Bank headquarters is closed on March 10, 2023 in Santa Clara, California. Silicon Valley Bank hit with a bank run amid a liquidity crisis.
When several uninsured depositors became alarmed over SVB's liquidity issues, many scrambled to pull out their money, causing regulators to step in and stop the bleeding.
However, credit unions are much less likely than banks to have that problem, given that they cater to working people and their depositors are largely individuals whose accounts are lower than $250,000.
Treichel says data shows that the largest 800-or-so banks in the U.S. have an average of roughly 36% of their deposits uninsured. However, even the largest credit unions with more than a billion dollars in assets only have around 9% of their deposits uninsured.
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Dr. Angela Vossmeyer, associate professor of economics at Claremont McKenna College and faculty research fellow at the National Bureau of Economic Research, agrees that on the liability side, credit unions are in a much better place than banks because a greater percentage of their deposits are insured.
On the asset side of things, credit unions and banks alike could run into the same problem SVB had by investing in long-term Treasury securities that end up underwater as the Federal Reserve hikes rates.
However, Vossmeyer says the new Bank Term Funding Program set up by regulators in the aftermath should provide the liquidity institutions need in the instance of that occurring moving forward, and both banks and credit unions have access to the program.
It is important to note that credit unions can fail, and have, even prior to the current banking crisis. However, their depositors are made whole from payouts from the NCUA insurance fund.
Vossmeyer says most credit unions are regulated by the NCUA, but any members concerned about the safety of their deposits can check to be sure their institution is covered by that insurance fund.
In the meantime, she reiterated that a full-fledged "bank" run on a credit union would be highly unlikely, telling FOX Business, "It would take a lot of odd stuff to happen."
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