Trumpeting Structural Advantages to Attract and Retain Depos

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Historically, credit unions have distinguished themselves from their bank competitors by emphasizing: (1) their community-minded mission and personalized service and (2) the lower fees and competitive rates on loans and deposits that they can offer as a result of their not-for-profit status.

Against the recent maelstrom at Silicon Valley Bank and Signature Bank, however, there are several structural advantages of the credit union model worthy of further examination. Together, these attributes should be highlighted by credit unions looking to attract and retain deposits in the current environment. If credit unions can successfully distinguish their model, it is likely that they can play a key role in restoring the confidence in the financial system.

A Brief History

Credit unions have served the people of the U.S. since 1909. They are member-owned, not-for-profit organizations generally managed by volunteer boards of directors from the communities they serve. These institutions can be state or federally chartered and are committed to meeting the credit and savings needs of consumers, especially in the low-to-moderate income group. For more than a century, they have served as an important conduit to offer financial services and spread credit across the vast geography of the United States.

As of YE 2022, the CU industry served more than 135 million individual members and held over $1.87 trillion in deposits across more than 4,800 federally insured institutions. The National Credit Union Administration (NCUA), a federal agency, oversees the national CU system and governs the coverage of insured accounts at all federally insured CUs. Despite the industry’s size, it remains a small fraction (roughly 9%) of the overall banking system. For some perspective, JP Morgan alone reported more than $2 trillion in total deposits and $3.2 trillion of total assets at YE 2022. 

Distinguishing the Credit Union Model

For many, the recent episodes at Signature Bank and Silicon Valley Bank have signaled the fragility of our financial system. At the very least, they have forced many Americans to ask questions about the particular risks of the monies that they routinely hold in the country’s financial institutions. At the same time, financial professionals have been looking closely at the structural risks of the system. 

Against such a backdrop, credit unions have certain structural advantages which gird them against the deposit flight or bank run scenario that plagued SVB and Signature.

First, unlike most banks, credit unions do not have publicly listed shares. This makes them less susceptible to an attack from short sellers that might spread to depositors. In recent weeks, there has been an increasing amount of attention paid to the potentially combustible combination of publicly listed shares and social media in accelerating the fear factor once a bank has been identified – rightly or wrongly – as a potential target of deposit outflows. 

Second, credit unions hold far fewer uninsured deposits than their bank counterparties. By way of comparison, 45% of bank deposits are above the $250,000 insurance limit, while only 9% of credit union deposits are uninsured. Similarly, credit union shares tend to be more diversified, with smaller average account sizes than their bank counterparts. 

Third, the consumer-oriented nature of credit unions adds to their diversification. In short, the nature of their loan books equates to smaller account sizes and loan categories with historically lower loss ratios. Credit unions tend to favor mortgages and new and used car loans, while banks have traditionally catered to the riskier loan categories of small businesses, favoring loan categories like commercial real estate (CRE), commercial and industrial (C&I) and construction and development (C&D) loans. In a recent Credit Union Sector Overview (Feb. 23, 2023), our friends at KBRA animated this conclusion -- showing that credit unions have weathered the various recessions and financial crises extremely well over the last 50 years. During that period, KBRA reports that credit unions had an average failure rate of 0.27% versus a 0.65% failure rate for banks.

A word of caution is in order here, however. The most recent vintage of credit union loans has seen a sharp increase in indirect loans and fintech sourced loans. And, the jury is still out on the long term outlook of these categories. Also, the Fed’s tightening cycle will certainly bring economic pressures that could negatively impact credit quality and charge-offs going forward. The last decade’s benign credit environment is certainly in the rearview mirror. And, boosted provision expense and significant headwinds to earnings will likely be the reality for the foreseeable future.

The final structural advantage for credit unions is their unique capital structure. Credit unions are owned by their members and cannot issue equity securities. This means that ongoing earnings are entirely dedicated to internal capital generation. It also means that shareholder pressure for returns is non-existent. This serves to strengthen credit unions over the long run. As a result, credit unions typically have less incentive to take on risks while growth tends to be slower and more methodical than in their bank counterparts.

Conclusion

Overall, these structural differences should benefit credit unions as they compete to gather and maintain the deposits of the American people. In turn, Americans should take comfort in the resiliency of the credit union corporate structure, the diversification and smaller size of their accounts, their favorable loan composition, and their comparatively favorable failure statistics. Now, it is up to the credit unions to make their case.