Credit Unions Are Too Big to Flail

Silicon Valley Bank – failed. Signature Bank – failed. First Republic Bank – failed.

In the banking world, the first half of 2023 has been like watching the tide rush out before a hurricane hits, with fish left gasping for air in the muddy banks on the Florida coastline.

In this analogy, the fish are regional banks and the hurricane still off shore is the stock market-driven financial sector made up of JPMorgan Chase, Bank of America, Wells Fargo and Citi Bank. These too-big-to-fail organizations have been allowed to form into a permanent Category 5 storm in which they have the ability to reshape the financial environment at will, while economic meteorologists tell citizens to not panic as homes are destroyed and lives are treated as commodities.

We’re watching yet another potential regional bank/fish flopping around, as it was revealed that PacWest Bankcorp customers removed almost 10% of their total deposits earlier in May as panic set in during the failure of First Republic Bank.

According to CNN, PacWest’s stock is down nearly 80% in 2023. The two outstanding questions at this point about the future of the bank are: Will it sell or will it fail?

U.S. Treasury Secretary Janet Yellen, while promoting the safety and soundness of the banking system, says she believes more consolidation of the midsized banks will occur and regulators should be open to the idea of more merger activity.

Unlike credit unions, the one thing I’ve learned about the big banking system as I’ve watched it over the years is it has a tendency to grow during chaotic times – at least the biggest of the big banks grow.

Credit unions seem to revel in the quiet times and want the calm. While understandable, I think it’s time to stop that behavior and turn up the volume to show that credit unions are in the game, and how damn reliable the credit union system is and has been over time.

The system has grown into what I refer to as a too-big-to-flail industry.

I have to give the benefit of the doubt to the credit union regulatory leaders that they are doing their best and working in the background to ensure some kind of stability remains intact. It’s just that that work is simply too quiet and we need to hear more from them.

On March 13, the NCUA placed a headline at the top of its website, “Chairman Harper’s Statement on the Safety and Soundness of the Credit Union System.”

The statement read: “The credit union system remains well-capitalized and on a solid footing. The National Credit Union Administration continues to monitor credit union performance through both the examination process and offsite monitoring, and it will continue to do so into the future.

“Credit unions have access to a wide range of liquidity sources. The NCUA, along with its Central Liquidity Facility, is able to provide a back-up source of liquidity to member credit unions as needed.

“The agency continues to coordinate with the other federal financial institution regulators to ensure the continued resiliency of the American financial services system.

“As always, the NCUA is committed to the protection of credit union members and the safety and soundness of the credit union system overall. No one has ever lost a single penny of insured share deposits within the credit union system.”

While those talking points, which were regurgitated by credit union trade groups and leagues, were good to have at the time and made for good headlines, Harper’s 138-word statement was posted more than two months ago.

It’s now May 15, as of this writing, and more banks have collapsed since then – banks even larger than Silicon Valley.

On May 1, the FDIC released an overview of the deposit insurance system “and options for reform to address financial stability concerns stemming from recent bank failures.”

In the 73-page report, “Options for Deposit Insurance Reform,” FDIC Chair Martin Gruenberg said, “The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system. This report is an effort to place these recent developments in the context of the history, evolution, and purpose of deposit insurance since the FDIC was created in 1933.”

I understand the banking system and the credit union system aren’t an apples-to-apples comparison. It’s more like an entire universe-to-asteroid comparison, maybe.

In this bank failure time, communication styles are comparable. Let’s use this as a comparison: 73 pages to 138 words.

We ask credit union organizations about the health and safety of the credit union industry and we continue to get the same “No one has lost a single penny” and “We’re keeping an eye on things” statements.

The closest we come to getting a read on the issue comes from NCUA Call Reports, lending trends and credit union economists talking about recession probabilities.

For instance, from our perspective at CU Times, the communication void left by the NCUA has been filed with statements, projections and analysis from credit union economists about what they believe the industry is facing in the months ahead. For them, it’s not about bank failures, just economic factors. Depending on who you talk to, their outlooks vary widely.

At one end of the spectrum, CUNA Chief Economist Mike Schenk has been the most pessimistic about the possibility of a recession. He put the chances at 55%.

CUNA Senior Economist Dawit Kebede’s analysis has been a bit more muted and has stated that “a recession is possible by the end of this year or early next year.”

NAFCU Chief Economist Curt Long has been Mr. Optimism with his outlook, putting the chances of a recession at 30%.

Again, the economists are looking at the hard data and not the messaging of the strength of the credit union system as regional banks struggle. While interesting to us, it’s still not providing communication about the skin in the game for credit unions in the broader financial field.

This week brings two important opportunities for credit union messaging. The first is the U.S. House Financial Services Committee meeting where financial regulators, including Chairman Harper, are scheduled to testify about the current state of oversight in the financial industry after the bank failures.

A couple of days later, the U.S. Senate Committee on Banking, Housing and Urban Affairs will hold a hearing titled “Oversight of Financial Regulators: Financial Stability, Supervision, and Consumer Protection in the Wake of Recent Bank Failures.” Chairman Harper, along with Vice Chair for Supervision at the Federal Reserve Michael Barr, FDIC Chair Martin Gruenberg and others are scheduled to testify.

While the hearing’s title is much too wordy, I hope Chairman Harper takes the opportunity to give us more than 138 words to explain how credit unions are doing during this chaotic time.

Michael Ogden is editor-in-chief for CU Times. He can be reached at mogden@cutimes.com.