Liquidity crunch pushes credit unions to make play for public funds
Credit unions in Arkansas are looking ahead to 2021 in the hopes that the third time’s the charm when it comes to legislation allowing them to accept deposits from public entities.
In about one-third of all states, CUs aren't explicitly permitted to take deposits from cities, state agencies and other public institutions, the National Association of State Credit Union Supervisors estimates. Industry advocates argue this creates a disparity with banks, limits the returns public money can generate for taxpayers and removes a potential avenue for deposits for credit unions.
Because of that, credit unions in at least two states – Arkansas and Florida – are lobbying lawmakers to update these laws.
“We can offer a service to municipalities and provide competition,” said Eric Mangham, chief financial officer at Arkansas Federal Credit Union, one of the institutions currently lobbying to accept those funds. “Ultimately this should improve results. If we are paying higher rates, we are getting additional funding and the ability to grow deposits. We prefer to grow them locally.”
Arkansas FCU had unsuccessfully worked to change the law in 2017 and then joined forces with the Cornerstone Credit Union League this year to lobby for the proposal but came up short again.
Credit unions have seen a growing need for additional deposits to fuel loan growth. In the fourth quarter of 2018, the national loan to share ratio reached 85.6 percent, up three percentage points from a year earlier, according to data from the National Credit Union Administration. That liquidity squeeze is likely to continue.
“Right now across the country, there is huge loan demand and funding is a huge issue,” said Randy Dennis, president of DD&F Consulting Group, which works with banks and credit unions. “Municipal funds have gone from being a darling to a stepchild…[to] everyone vying for deposits so they are more favored again.”
Bringing in deposits from a public entity could be a boon for a credit union, but this avenue is still closed to many institutions since not every state clearly allows it.
For one, public entities would likely get better returns on their deposits since there would more competition in the marketplace to attract this funding, said Lucy Ito, president and CEO of NASCUS. It would also help public institutions reduce their own risk by having their money spread out to different financial institutions and industries.
“You would think in the interest of their own state and their own credit unions, Arkansas would want to allow this,” Ito said.
Additionally, changing these laws would allow credit unions to better manage their own risk and boost their safety and soundness by diversifying their funding sources, experts said.
An institution may have to pay more for this funding to be competitive but these accounts tend to be larger than a regular consumer, said Tom Glatt Jr., principal at Glatt Consulting Group. The deposits would ebb and flow differently than consumer accounts as well.
“If they can take these deposits, the difference would be generally the size and consistency of the deposits and how long they stay on the books,” Glatt said. “Generally speaking, you would see these as a liquidity move where you can plan a bit better. Consumers are subject to the winds of the cycle.”
A local municipality was set to park its funds with the $1.2 billion-asset Arkansas Federal a few years ago because the credit union was paying a higher rate than banks, said CEO Rodney Showmar. But the entity pulled out after being informed that Arkansas law required the money to be put into an institution insured by the Federal Deposit Insurance Corp. Showmar believes this language in the law is an inadvertent oversight leftover from when credit unions were overseen by the FDIC.
“This would be added competition,” Showmar said. “The consumer would win and the consumer is a public entity. They are investing the money of taxpayers and citizens of the state. The people who would benefit is everyone in Arkansas.”
Not for everyone
Although being able to accept public funds could help with a number of issues, it is unlikely that every credit union would be interested in these deposits, experts said. For one, a credit union needs to have enough scale to handle a large deposit, Glatt said. Otherwise, it could skew key metrics, such as capital ratios.
The credit union may also need to offer other services, such as cash management, that a public entity would require, Dennis said. Credit unions with a limited member business lending portfolio may not have these products.
There is also the issue of getting state laws changed to allow credit unions to accept these funds. Bankers have fought the measures in both Arkansas and Florida. Under the proposal in Florida, credit unions could accept public money if there is no qualified institution within five miles of the entity needing services.
"We don't have a problem with credit unions,” said Alex Sanchez, president and CEO of the Florida Bankers Association. He argued that bankers were concerned about the largest credit unions gaining the ability to take public funds.
“Leave the mom and pop credit unions out of this,” he added. “Leave them alone. They should be exempt.”
In Arkansas, banks hit upon the credit union industry’s tax-exempt status to defeat the bill. Lorrie Trogden, president and CEO of the Arkansas Bankers Association, wrote in an opinion piece for Arkansas Business that “allowing credit unions to take public deposits would only work against the state by reducing the state’s tax base as well as leaving less capital in community banks for lending to small businesses and consumers.”
There were two hearings on the measure but credit union lobbyists weren’t able to secure enough votes to get it out of committee, said Jim Phelps, chief government relations officer at the Cornerstone league. The bill’s sponsor eventually decided to pull it and complete further study on the matter.
But Phelps pledged to renew the efforts when a new state legislature convenes in 2021. He said the league was completing a comprehensive review of its strategy and doing research on the marketplace to inform its campaign next time.
“The banker opposition was vigorous,” Phelps said. “But we are committed to continue to work on this. Passing legislation is difficult. There is only one way to pass a bill but there’s multiple ways to kill a bill.”