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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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.
