CU Strategies Amid Funding, Rates, Pricing, Insurance & Politics

As the economy enters a new phase, rising interest rates and substantial inflation resemble a period not experienced since the early 1980s. Many credit union CFOs, CEOs, and other leaders have never experienced rapidly rising rates, a changing appetite for loans, and intense competition to attract and retain deposits.

Lining up proper deposit pricing and a solid strategy for the years to come will be crucial, as well as keeping informed on deposit-insurance chatter in Congress and on Capitol Hill — which is why credit unions should take note of the following research and guidance released this week.

Research Examines CU Industry Loan & Deposit Strategy
The Credit Union National Association (CUNA) Finance Council has published a new white paper: Loan and Deposit Strategy: Managing the Great Squeeze. It examines:

• Evolving your credit union’s playbook to deal with tight margins.
• Best strategies for loan and deposit operations.
• How to think about alternative funding options.
• Overcoming organizational silos.
• The related effects of pressure on non-interest income sources.

CUNA: CUs Must Have Deposit Insurance Parity with Banks
Credit unions must receive parity with banks in any deposit reform legislation, CUNA wrote to House Financial Services and Senate Banking, Housing, and Urban Affairs Committee leadership Monday. Congress and the Federal Reserve have indicated interest in deposit insurance reform in the wake of recent high-profile bank collapses.

“Our primary concern regarding any deposit insurance reform legislation passed by Congress is to ensure that credit unions receive parity, fair treatment, and equal protection with banks,” the letter reads. “CUNA is also concerned with any potential legislative impact on the National Credit Union Share Insurance Fund (NCUSIF) and resulting effects on the equity ratio and capital requirements required by the Federal Credit Union Act and implemented by the NCUA.”

The letter also addressed:

• Congress’s reported consideration of proposals to provide deposit insurance coverage for business transactional accounts at financial institutions, stating that these accounts have daily balances that fluctuate frequently based on receipts, payments, payroll, and the many other transactions that occur in the normal cycle of business activity.
• The fact that the traditional model of fixed deposit insurance may not be the best way to insure such accounts. Should Congress direct the Federal Deposit Insurance Corporation’s insurance fund to provide higher or unlimited coverage for such accounts, reciprocal instructions pertaining to the National Credit Union Share Insurance Fund (NCUSIF) should be added.
• Encouragement of Congress to consider the effect that any increased amount and scope of deposit insurance will have on mandatory credit union capital requirements.

FDIC’s Special Assessment Proposal to Bolster Insurance Fund
Banks with assets of $50 billion or more would pay more than 95 percent of a special assessment aimed at making up the nearly $16 billion hit to the Federal Deposit Insurance Corporation’s (FDIC) deposit insurance fund after several recent bank failures, according to an FDIC proposal issued this week.

The FDIC’s proposal would levy an annual “special assessment” rate of 12.5 basis points to banks’ estimated uninsured deposits as of Dec. 31, 2022. Those with assets of less than $5 billion would not be subject, making 113 banks subject to the fee and 4,000 smaller institutions exempt.

This special assessment proposal is subject to a 60-day comment period. If the rule is adopted, the assessment would be collected over eight quarters, beginning in June 2024.

Fed’s Latest Reports: Financial Stability & Lending Survey
Banking system pressures, real estate stress, and persistent inflation top worries about financial stability — though the system overall remains stable, the Federal Reserve stated in a report this week. It addressed:

• The nation’s financial and economic health and a survey regarding the biggest fears about current conditions.
• Persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate, and geopolitical tensions.
• Industry sectors having elevated potential for financial trouble going forward, including money market funds, stablecoins, and hedge funds (particularly larger firms).

Additionally, the Fed released its Senior Loan Officer Opinion survey, which showed that:

• Recent tumult in mid-sized financial institutions caused banks to tighten lending standards to households and businesses.
• Requirements got tougher for commercial and industrial loans, as well as for many household-debt instruments such as mortgages, home equity lines of credit and credit cards.
• Banking loan officers expect further troubles to persist over the next year, owing largely to diminished expectations for economic growth, as well as fears over deposit outflows and reduced risk tolerance.
• Respondents gave a fairly gloomy outlook of what’s ahead for the next 12 months (spring 2023 to spring 2024).

California DFPI’s SVB Report: Oversight, Regulation & Supervision
The California Department of Financial Protection and Innovation (DFPI) has released the following report: Review of DFPI’s Oversight and Regulation of Silicon Valley Bank.

It summarizes the department’s supervision of Silicon Valley Bank and reviews circumstances leading to its failure, including the following:

• The bank was slow to remediate regulator-identified deficiencies, and regulators did not take adequate steps to ensure the bank resolved problems as fast as possible.
• Recent rising interest rates led to the bank’s startup deposits decreasing and its investments losing value, contributing to liquidity challenges.
• The bank’s unusually rapid growth was not sufficiently accounted for in risk assessments.
• The bank’s high level of uninsured deposits contributed to the bank run.
• Digital banking technology and social media accelerated the volume and speed of the run on the bank and contributed to its ultimate collapse.
• “Next steps” for the DFPI are also outlined to improve its supervision of state-chartered banks for the future.

The DFPI has also posted confidential supervisory information about Silicon Valley Bank — including examination report summaries, supervisory letters, and ratings downgrades — so policymakers and the public are fully informed about the circumstances leading to the bank’s demise.