Liquidity issues? NCUA’s recent nonmember deposit proposal may help

A proposed rule from the National Credit Union Administration could help credit unions address looming liquidity problems.

NCUA approved a proposed rule during its May board meeting that would allow federal credit unions to accept nonmember deposits for up to 50% of the institution’s unimpaired capital and surplus while also eliminating the current waiver-request process. If the rule is finalized, that would increase the threshold from its current 20% to 50%.

“Liquidity is the biggest piece that this would assist or help with,” said Onker Basu, senior director at Cornerstone Advisors. “The fight for liquidity goes beyond credit unions and banks of all shapes and sizes.”

Nonmember deposits can come from other credit unions, public entities and all other depositors. Under the current regulation, CUs may access funds of up to 20% of their share balance or $3 million, whichever is greater. Besides considering boosting the overall threshold, the proposal seeks comment on whether or not to remove the “or $3 million, whichever is greater,” clause that credit unions adhere to.

The new proposal hasn’t received any comments yet. The NCUA did not respond to a request for comment.

Credit unions could use nonmember deposits to increase their deposit base to support lending growth. The industry’s loan-to-share ratio was 82.4% in the first quarter, according to NCUA data. That’s up from 80.8% a year earlier. NCUA’s first-quarter state level data showed that the median ratio of total loans outstanding to total shares and deposits increased by four percentage points, to 68%, from the same period a year earlier.

In the first quarter, nonmember deposits totaled $12.3 billion, up almost 18% from a year earlier, according to NCUA data.

“They are loosening up their standards overall on nonmember deposits…,” said Jim Minge, president and CEO of Texas Trust Credit Union in Arlington. “I'm not as concerned with the NCUA rules because Texas has its own nonmember deposit rule, so they're a lot less structured, so they give us a lot more flexibility than the NCUA rules do."

Expanding access to nonmember deposits would provide credit unions with an additional option, especially in a time when both credit unions and banks are fighting to retain their current deposits and find new funding sources.

"It's really opened up the door for credit unions to be able to now, seriously, use the wholesale side of the balance sheet to create earnings," said Lew Lester, CEO at CU Capital Market Solutions.

The proposal could also make waves in terms of setting new precedent for states to follow.

Most states have some type of federal parity provisions, said Lucy Ito, president and CEO of National Association of State Credit Union Supervisors. That means many states would also increase their thresholds for nonmember deposits if NCUA makes this change.

“As such, final approval of NCUA’s proposed threshold increases could definitely lead to increase thresholds in those states where a lower threshold is in place, especially where a state already mirrors NCUA’s limits on non-member shares,” Ito said.

However, bankers were not pleased with the proposal and have already voiced their discontent. The Independent Community Bankers of America said it would explore all of its options, including a possible lawsuit, if the proposal is finalized.

That step has precedent. The American Bankers Association sued NCUA over the regulator’s revised field-of-membership rule, while ICBA sued NCUA over its member business lending rule.

“[A]nd I’m not saying that we’d necessarily sue the NCUA over this, but I certainly think that we would examine all of our options to see for what our response should be,” said Chris Cole, ICBA’s senior regulatory counsel.

During NCUA’s May meeting, Larry Fazio, director of the Office of Examinations and Insurance, said that small credit unions would probably benefit the most from the change. These institutions generally have higher net worth levels compared with total assets. Still, large credit unions would be able to take advantage of the threshold increase as well.

The ICBA was critical of the notion that this proposal would assist small and low-income designated credit unions. Fifty-seven percent of the credit union industry is designated as low-income, Cole said. Bankers are skeptical about how so many credit unions could be predominantly low-income, he explained.

“This is another example of the NCUA pushing the envelope and acting as a cheerleader for the industry it regulates,” Cole said.