Economists: CUs Financially Strong as Analysis of Bank Failures Begins

Credit union trade officials said Monday credit unions have strong capital buffers and don’t have the same issues that led to the failure of two banks over the weekend.

Silicon Valley Bank’s failure was triggered after it had to sell securities at an actual loss to cover a wave of withdrawals. The loss of value for available-for-sale securities has been widely felt at banks and credit unions, but the losses have mostly been unrealized, mark-to-market losses on notes still held by the institutions.

But CUNA Chief Economist Mike Schenk and Greg Mesack, NAFCU’s SVP of government affairs, said the underlying issues that caused runs on their deposits were tied to their heavy dependence on one industry and high percentages of deposits that exceeded the FDIC’s insured limit of $250,000 per account.

Regulators seized control Friday of Silicon Valley Bank of Santa Clara, Calif., which had $209 billion in assets as of Dec. 31, and on Sunday seized Signature Bank of New York, which had $110 billion in assets as of Dec. 31.

Silicon Valley’s loans were concentrated among venture capital funds and technology startups. Signature had catered to cryptocurrency companies.

FDIC data showed that 94% of Silicon Valley’s $161.5 billion in deposits was uninsured, and Signature had 90% of its $88.6 billion in deposits uninsured. On Sunday, regulators said they would insure all deposits — regardless of the $250,000 limit.

By comparison, Schenk said only about 8% of credit union deposits are uninsured.

Schenk said credit unions also have “a have a significant capital buffer.”

Their capital ratio was over 9.2% as of Jan. 31, which includes effects of the drop in values of available-for-sale securities. It’s 2 percentage points lower than pre-pandemic levels “but a solid reading overall,” Schenk said.

“I don’t think the vulnerabilities are that great,” he said.

NAFCU Chief Economist Curt Long said “credit unions overall are in good condition.”

Schenk said Silicon Valley Bank had higher-than-normal unrealized losses in its portfolio of available-for-sale securities, in part because it tended to invest in long-term securities.

Credit unions have also had large unrealized losses in the value of their AFS securities, but Schenk said CUNA economists’ analysis has not found any widespread vulnerability among credit unions. “We didn’t see any outsized exposures,” he said.

NCUA data showed credit unions held $322.5 billion in available-for-sale securities as of Dec. 31, accounting for 15% of their $2.19 trillion in assets.

The accumulated unrealized loss in value of those securities was $38.3 billion on Dec. 31, up from $2.4 billion in accumulated mark-to-market losses a year earlier.

Long said he didn’t know whether the bank failures will affect the Fed’s decision on rates after its next meeting ends March 22.

At this point, Long said the odds are the Fed will raise rates.

Long said he is watching for the release of the Consumer Price Index Tuesday to gauge how much progress has been made in reducing inflation toward the Fed’s 2% goal. If February’s inflation comes in high, Long said the Fed is likely to read that it needs to do more.

The retail sales report Wednesday will be an indicator of how much the economy is heating or cooling.