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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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 circumstances, 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 the 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 credit unions safer from failure 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.

Is my money safe in a credit union during a recession? ›

Both can be hit hard by tough economic conditions, but credit unions were statistically less likely to fail during the Great Recession. But no matter which you go with, you shouldn't worry about losing money. Both credit unions and banks have deposit insurance and are generally safe places for your money.

Can banks seize your money if economy fails? ›

Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

Could credit unions be in trouble? ›

Experts told us that credit unions do fail, like banks (which are also generally safe), but rarely. And deposits up to $250,000 at federally insured credit unions are guaranteed, just as they are at 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.

Can credit unions go bust? ›

If a credit union is placed into liquidation, the NCUA's Asset Management and Assistance Center (AMAC) will oversee the liquidation and set up an asset management estate (AME) to manage assets, settle members' insurance claims, and attempt to recover value from the closed credit union's assets.

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.

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 circumstances. This is allowed when the consumer misses a debt payment owed to that same financial institution.

Is it better to have cash or money in bank during recession? ›

Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.

Where is the safest place to put your money in a recession? ›

Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
  • Defensive sector stocks and funds.
  • Dividend-paying large-cap stocks.
  • Government bonds and top-rated corporate bonds.
  • Treasury bonds.
  • Gold.
  • Real estate.
  • Cash and cash equivalents.
Nov 30, 2023

Should I pull all my money out of the bank? ›

In short, if you have less than $250,000 in your account at an FDIC-insured US bank, then you almost certainly have nothing to worry about. Each deposit account owner will be insured up to $250,000 — so, for example, if you have a joint account with your spouse, your money will be insured up to $500,000.

What protects your money if a bank fails? ›

The FDIC provides deposit insurance to protect your money in the event of a bank failure. Your deposits are automatically insured to at least $250,000 at each FDIC-insured bank.

Is it true that banks can seize your money? ›

The short answer is no, not directly. A bank can only directly access funds from an account you hold at a different financial institution to settle debts if they follow the legal process of obtaining a judgment and garnishment order.

Is Bank of America safe from collapse? ›

Bank of America is just one place below JPMorgan Chase on both the 2023 G-SIBs list and the Federal Reserve's list of the largest U.S. banks, which is why it was chosen in our research as one of the safest banks.

What are the biggest risks facing credit unions? ›

Credit unions face a multitude of risks including risks related to credit, interest rates, liquidity, transactions, compliance, strategy, and protecting their reputation.

Can a bank run happen to a credit union? ›

Typically, a bank run hits just one financial institution. However, a single bank run might help trigger bank runs at other institutions. But since the Great Depression, bank runs have been unusual, thanks in large part to federal insurance of deposits at banks and credit unions.

What happens if a credit union shuts down? ›

The NCUA will send you a letter notifying you if your credit union closes and will return your funds within five days of closing. If your balance exceeds $250,000, you'll need to complete a Member Confirmation and Affidavit form to receive any funds over the insured limit.

Are credit unions in decline? ›

NCUA: Number of Credit Unions Continues Decline, But Membership Is Up. The number of federally insured credit unions declined to 4,604 institutions in the fourth quarter of 2023, a drop of 156 financial institutions from a year ago, the National Credit Union Administration said Tuesday.

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