Failed bank fallout could open doors for credit unions. Here's what to know (2024)

Russ WilesArizona Republic

The failure of Silicon Valley Bank and heightened concern over the fragility of the banking system could drive membership gains for credit unions, which provide many of the same financial services but with different motivations — and with different repercussions when they fail.

Kim Reedy, president and CEO of OneAZ Credit Union, said his Phoenix-based institution has fielded more questions in recent days from concerned customers following the failure of Silicon Valley Bank and the continuing unease around other regional banks such as Alliance Bank of Arizona and its parent, Phoenix-based Western Alliance Bancorporation.

"They want to know if we're OK," Reedy said. "Absolutely, we're OK."

What does a credit union do, and how do they differ from banks?

Credit unions are not-for-profit institutions that cater to customers or members who share a common bond, whether it's employment in a certain industry, military service, membership in the same religious denomination, people living in the same state or something else. They offer most of the same products and services as banks, from checking accounts and mutual funds to car loans, home mortgages and business loans. And they frequently compete directly with banks.

But one difference is that credit union profits are plowed back into their operations to help lower loan costs and boost deposit interest rates for the benefit of members. Another difference is that credit union executive officers often are more reflective of mainstream America, and the people who sit on credit union boards are members, too.

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"We have several who are current or retired members of state government," Reedy said.

That contrasts with most of the directors who oversee the operations of large public corporations, whether in banking or other industries. At SVB Financial, parent of Silicon Valley Bank, seven of the 12 directors had earned degrees from nearby Stanford University, and most of those held MBAs or Master of Business Administration degrees.

The company's directors, possibly succumbing to group think, apparently failed to ask obvious questions for a financial institution, such as: Why does our bank have such a high proportion of uninsured deposits, and does that expose us to special risks?

A sudden run on deposits, most of which were uninsured, precipitated the bank's downfall last week.

Causes of credit union failures

Credit unions do fail from time to time, too, and have seen a few more failures in recent years than banks.

Nationally, two have gone under already in 2023, and on average seven failed in each of the prior five years, according to data compiled by the National Credit Union Administration, a federal agency akin to the FDIC or Federal Deposit Insurance Corp. for banks. During and immediately following the Great Recession, credit union failures were more common than they are now, as were bank failures.

One Arizona institution that failed in 2010, AEA Federal Credit Union, was able to recover after working five years with federal regulators. The institution serves roughly 32,000 members in Yuma and La Paz counties.

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Failed bank fallout could open doors for credit unions. Here's what to know (3)

Failed bank fallout could open doors for credit unions. Here's what to know (4)

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Silicon Valley Bank's collapse prompted leaders to respond as customers in Southern California lined up to withdraw funds from First Republic Bank.

Claire Hardwick, USA TODAY

When credit unions go under, they don't pull down the stock market or trigger systemic worries because credit unions don't have shares trading in the market. Credit unions also typically are smaller than banks, though some of the larger ones count roughly 100,000 or more members and hold more than $1 billion in assets, primarily loans. Larger Arizona credit unions include Desert Financial, Arizona Financial, OneAZ and TruWest.

One risk to which many credit unions are exposed is geographic concentration of their loans and members. Reflecting the state's strong economy, Arizona's credit unions right now are national leaders in many metrics including asset growth, deposit growth, membership growth, return on assets and profitability. Last year, Arizona's credit unions ranked No. 1 in loan growth, according to the NCUA.

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Uninsured deposits an issue at credit unions, too

Credit unions offer essentially the same $250,000 deposit insurance per account as banks, with the coverage backed by the full faith and credit of the United States government and supported by a deposit-insurance fund.

But like banks, some credit unions also have uninsured deposits. At OneAz, for example, 12% of the entity's $2.97 billion in deposits was uninsured at the end of 2022. Some of that represents temporary circ*mstances, such as members who recently sold a home, transferred the proceeds to their checking accounts and haven't yet deployed the cash elsewhere, Reedy said.

Uninsured deposits at Silicon Valley Bank were reported as to be much higher, in the neighborhood of 90%, precipitating a run by depositors that doomed the bank.

A small proportion of banks and credit unions don't offer deposit insurance, so it's important to inquire about this safeguard.

Like banks, credit unions also have to make sure to spread their loans to mitigate risks, Reedy said. As an example, he cited high concentrations of loans backed by taxi-cab medallions or permits in New York City that caused problems several years ago.

The once-stable taxicab business was disrupted by the emergence of Uber and other ride-sharing services, leading to the closing of Melrose Credit Union and LOMTO Federal Credit Union in 2018, with member shares transferred to other credit unions.

"The collapse of the taxi medallion market placed an enormous strain on credit unions that served the taxi industry and on medallion-loan borrowers and their families," the NCUA said in a statement at the time.

Reach the reporter at russ.wiles@arizonarepublic.com.

Failed bank fallout could open doors for credit unions. Here's what to know (2024)

FAQs

Will credit unions be affected by bank collapse? ›

Credit unions, however, are unique in that they are much safer for people to put their money into because they are less vulnerable to bank runs or liquidity issues, the same factors that caused the Silicon Valley Bank collapse in March 2023, along with the fall of several other banks.

Are US credit unions in trouble? ›

National Credit Union Administration (NCUA) credit unions had seven conservatorships/liquidations in 2022 and two so far in 2023. While credit unions have experienced several failures in 2022, there were no Federal Deposit Insurance Corp.

Are credit unions safer than banks? ›

Generally, credit unions are viewed as safer than banks, although deposits at both types of financial institutions are usually insured at the same dollar amounts. The FDIC insures deposits at most banks, and the NCUA insures deposits at most credit unions.

Which banks are going under? ›

Earlier last year Silicon Valley Bank failed March 10, 2023, and then Signature Bank failed two days later, ending the unusual streak of more than 800 days without a bank failure. Before Citizens Bank failed in November 2023, Heartland Tri-State Bank failed July 28, 2023 and First Republic Bank failed May 1, 2023.

Are credit unions safer from collapse than banks? ›

However, because credit unions serve mostly individuals and small businesses (rather than large investors) and are known to take fewer risks, credit unions are generally viewed as safer than banks in the event of a collapse.

Are credit unions protected from collapse? ›

The National Credit Union Administration (NCUA) is an independent agency created by the U.S. government to regulate and protect credit unions and their owners. Just like the FDIC, the NCUA insures up to $250,000 to all credit union members and provides protection in the event of a credit union failure.

What is the biggest risk to credit unions? ›

Liquidity Risk: The risk of not having sufficient liquid assets to meet the credit union's short-term obligations, which could impact its ability to function effectively and serve its members. Interest Rate Risk: Credit unions often have a significant portion of their assets and liabilities tied to interest rates.

How safe are credit unions now? ›

Credit unions are insured by the National Credit Union Administration (NCUA). Just like the FDIC insures up to $250,000 for individuals' accounts of a bank, the NCUA insures up to $250,000 for individuals' accounts of a credit union.

What happens to my money if a credit union fails? ›

When a credit union fails, the NCUA is responsible for managing and closing the institution. The NCUA's Asset Management and Assistance Center liquidates the credit union and returns funds from accounts to its members. The funds are typically returned within five days of closure.

Why do banks not like credit unions? ›

For decades, bankers have objected to the tax breaks and sponsor subsidies enjoyed by credit unions and not available to banks. Because such challenges haven't slowed down the growth of credit unions, banks continue to look for other reasons to allege unfair competition.

Can the government take your money from a credit union? ›

Through right of offset, the government allows banks and credit unions to access the savings of their account holders under certain circ*mstances. This is allowed when the consumer misses a debt payment owed to that same financial institution.

Which is safer, FDIC or NCUA? ›

One of the only differences between NCUA and FDIC coverage is that the FDIC will also insure cashier's checks and money orders. Otherwise, banks and credit unions are equally protected, and your deposit accounts are safe with either option.

Which 4 banks are in trouble? ›

About the FDIC:
Bank NameBankCityCityClosing DateClosing
Republic First Bank dba Republic BankPhiladelphiaApril 26, 2024
Citizens BankSac CityNovember 3, 2023
Heartland Tri-State BankElkhartJuly 28, 2023
First Republic BankSan FranciscoMay 1, 2023
54 more rows

Which banks are collapsing in 2024? ›

First Bank Failure of 2024 Near Anniversary of SVB, Signature, and First Republic Failures. The seizure and subsequent sale of Republic Bank comes a little more than a year after a series of bank failures that rocked the industry in 2023, as Silicon Valley Bank and Signature Bank shut down in March 2023.

What banks are most at risk right now? ›

These Banks Are the Most Vulnerable
  • First Republic Bank (FRC) . Above average liquidity risk and high capital risk.
  • Huntington Bancshares (HBAN) . Above average capital risk.
  • KeyCorp (KEY) . Above average capital risk.
  • Comerica (CMA) . ...
  • Truist Financial (TFC) . ...
  • Cullen/Frost Bankers (CFR) . ...
  • Zions Bancorporation (ZION) .
Mar 16, 2023

Is my money at risk in a credit union? ›

All deposits at federally insured credit unions are protected by the National Credit Union Share Insurance Fund, with deposits insured up to at least $250,000 per individual depositor. Credit union members have never lost a penny of insured savings at a federally insured credit union.

What are the problems facing credit unions? ›

Top 10 Challenges Facing Credit Unions
  • Digital & AI Transformation. Digital banking is table stakes in banking. ...
  • Regulatory Compliance. ...
  • Cybersecurity Threats. ...
  • Competing with Larger Banks and Fintechs. ...
  • Membership Growth & Awareness. ...
  • Aging Membership. ...
  • Talent Acquisition and Retention. ...
  • Expanding Services.
Oct 13, 2023

What is the downfall of a credit union? ›

Credit union disadvantages

Membership may require meeting certain work, residential or occupational requirements. Many typically offer branches only in a limited area or region.

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