WASHINGTON-As the Federal Reserve looks for ways to pull liquidity out of the banking system, the board recently proposed a program to sell term deposits to financial institutions-a move that could add even more competition for beleaguered corporate credit unions.
The plan is designed to drain as much as $1 trillion of excess reserves and raises the specter of the Fed becoming a vehicle for deposits from CUs that have lose faith in the corporate system.
"At first blush, I think it could potentially create more competition for term deposits from credit unions that have direct Fed relationships," Brad Miller, former Association of Corporate Credit Unions executive director and new CEO at Southeast Corporate said. "This change could also provide corporates with an opportunity for placing their short term funds in an additional investment mechanism. It probably all depends on the rates that will be paid on these deposits, which will be determined through an auction process, but I suspect the offerings will be structured for big blocks of funds, not what we typically associated with term deposits."
While the Fed could start to compete with corporates for deposits, the competition would likely not be based on rates. NCUA spokesperson John McKechnie pointed out that share rates at corporates are better than agency offerings; the Fed proposal would cap deposit rates at a no higher "the general level of short-term interest rates," the central bank said.
"A corporate could experience a competitive effect due to a convenience factor, larger NPCUs parking money there as a 'one-stop shop,' or because such funds can be used as collateral for those CUs that would borrow from the Fed Discount window," McKechnie explained. "NCUA and corporates are aware of competition for deposit funding. This will continue to be a factor for corporates in the future, regardless of possible changes in Fed policy."
Brian Fogg, CEO at Credit Union of Vermont which recently pulled its member capital from Tricorp, said he was "immediately at odds with" the Fed plan from a philosophical standpoint. He argued that the government should not be creating "artificial investments" to help big banks gain a higher yield, though he is still hesitant about using corporates as a term deposit vehicle.
"While I will not rule out participation... I continue to assert that our best investment opportunity lies in continuing to lend to our members," Fogg continued. "Our excess liquidity is invested elsewhere using services such as Qwickrate."
For its part, CUNA appears most concerned with small and medium-sized credit unions getting frozen out of an opportunity to even considering investing in Fed term deposits.
"CUNA believes the authorization of term deposits may provide a favorable option for credit unions to earn interest on short term investments without credit risk," spokesperson Pat Keefe said. "However, we are concerned that the proposed auction method for determining which eligible institutions participate in each round of deposits may be dominated by the larger institutions.
