Following the events of the weekend, during which two mid-sized banks collapsed, NCUA Chairman Todd Harper issued a statement on the safety and soundness of the credit union system.
What happened at Silicon Valley Bank
California-based Silicon Valley Bank (SVB) suffered a run on deposits when customers feared they would be unable to withdraw their uninsured balances. State regulators then stepped in to seize the bank on Friday. This collapse was followed shortly after by New York-based Signature Bank as the FDIC, Federal Reserve, and Treasury scrambled to staunch the bleeding.
The run on SVB came following an announcement from the bank that they had taken a multi-billion dollar hit on securities investments.
Like many other banks and financial institutions during the time, SVB’s deposits skyrocketed during the pandemic—in SVB’s case doubling in 2021. With deposits climbing faster than it could be loaned out, the bank looked to U.S. Treasury securities, an “ultra-safe” investment. However, in a rapidly rising rate environment, the value of those securities plummeted. When SVB announced it was unable to raise the capital to offset the losses, venture capital firms urged companies using the bank to pull their business causing the panic.
With the FDIC stepping in to run the bank, regulators announced insured deposits up to $250,000 would be covered. However, uninsured deposits, as much as 85% of deposits, are still up in the air as regulators begin to sort through the madness.
How SVB’s collapse impacted other mid-sized banks
The uncertainty surrounding SVB led other mid-sized banks to worry as depositors lost faith in the system and feared for their own funds.
The collapse turned out to be the final domino in another vulnerable bank, Signature, which was one of the few financial institutions allowing deposits of cryptocurrency assets. As crypto suffered in recent months, especially following FTX, the bank was in trouble. Barney Frank, a board member for the bank, told The Wall Street Journal, “It was an SVB-generated panic. We were fine until the last couple of hours on Friday.”
Frank’s name may sound familiar—he is the former congressman whose name was attached to the Dodd-Frank Wall Street Reform and Consumer Protection Act, legislation passed in the wake of the 2008 financial crisis aimed at preventing future financial crises.
The collapse of Signature Valley Bank ($221B) marks the second biggest bank failure since Washington Mutual ($307B) in September 2008.
Credit union industry forced to respond
In light of all the uncertainty and fear in the financial industry, credit unions have had to do their own damage control to soothe owners. NCUA Chairman Harper’s statement on Tuesday, March 13, was meant to assuage those fears.
“The credit union system remains well-capitalized and on a solid footing,” he wrote. “Credit unions have access to a wide range of liquidity sources. The NCUA, along with its Central Liquidity Facility(opens new window), is able to provide a back-up source of liquidity to member credit unions as needed.”
CUNA’s Chief Economist Mike Schenk also believes credit unions to be on solid footing. “I don’t think the vulnerabilities are that great,” he said. “The capital ratio at credit unions, which would account for any unrealized losses, is 9.2%. That’s about two percentage points lower than prepandemic, but really a solid reading overall relative to the 7% standard regulators deem to be well-capitalized. So, it’s a pretty significant capital buffer. We have begun analysis of individual institutions on unrealized losses and it appears pretty low. We don’t see any outsize exposure to unrealized losses.”
State Employees’ Credit Union published a notice on their website stating: “In light of recent events, we wanted to take a moment to assure SECU’s members of our continued fiscal strength. As the nation’s second-largest credit union with over $50 billion in assets, our deposits come from a diverse array of NC consumers – not any one industry. We are well-capitalized with over $5 billion in equity. Combined with ample liquidity options, your financial cooperative is in a good position to serve you now and into the future.”
As the situation evolves and regional banks continue to weather the storm, credit unions may find themselves in a position to have their message more readily heard among Americans.