For many Americans, safety and soundness are primary considerations when deciding where to park their cash.
Even with the backstop of federal deposit insurance, there’s a certain anxiety that goes along with having money in a crumbling financial institution. The latest Safe & Sound Star Ratings for credit unions should give members reason to breathe a little easier.
Credit union stability improves
The vast majority of credit unions are doing well enough to keep their doors open for the foreseeable future. According to Bankrate’s most recent data, compiled from Federal Deposit Insurance Corp. filings released in the third quarter of 2014, just 5.36 percent of credit unions had an unacceptably low Safe & Sound rating. That’s down from 6.53 percent in the third quarter of 2013.
Safe & Sound ratings take into account factors such as capital adequacy, asset quality, profitability and liquidity to determine a credit union’s strength and stability.
It’s no surprise that most credit unions are on sound financial footing, says Mollie Bell, chief engagement officer for Filene Research Institute.
Most were well-positioned to weather the financial crisis, she says.
“It definitely was not as big an issue as it was for banks,” Bell says. “And I think any issues that did exist (with credit unions), we’ve probably seen play out.”
Regulations ratcheted up in 2014
With the economy heading in a positive direction for a change, you’d think improved safety and soundness for credit unions would be a slam-dunk. But two big regulatory changes in 2014 may undermine some credit unions’ ability to stay afloat, says Vincent Hui, senior director at Cornerstone Advisors, a consulting firm for financial institutions:
Risk-based capital requirements: New proposed capital requirements that change the amount and quality of capital that credit unions must have on hand for riskier loans will change the way credit unions lend and their overall mix of business, Hui says.
“Even though the proposals are not final yet, it’s going to happen, and it’s really going to create some interesting dynamics for boards and managers,” Hui says.
- Increasing reach of the CFPB: While the Consumer Financial Protection Bureau is still a relatively young agency, its ability to create consumer protection rules and take enforcement actions against financial institutions represents a risk to credit unions.
Tough road for smaller institutions
While most people would probably agree that rules protecting consumers are a good thing, the cost for credit unions of making sure they comply with the new rules can be high, especially for smaller institutions, Hui says.
For instance, say you need to hire a new compliance officer to make sure you don’t get in trouble with the CFPB, and that compliance officer’s salary is $70,000. That cost is going to be a lot harder for a credit union with $20 million in assets than for a credit union with $700 million in assets, Hui says.
“(If I’m a credit union executive) I have to spend more money for compliance, which means I have less money to build up my capital and my investments. Yet, I still need to do that, so it’s going to decrease my earnings even more,” Hui says. “It’s going to be tough for them to maintain their level of safety and soundness.”
Bell agrees. She says the broad powers given to the CFPB have contributed to significant uncertainty about the future.
“It wasn’t credit unions, per se, that were part of the bank failures, and yet they’re being subjected to the regulations,” Bell says.
One bright spot for smaller credit unions: The new risk-weighted capital requirements won’t apply to credit unions that have less than $100 million in assets, so that could take some of the regulatory pressure off, Hui says.
Overall picture is positive
Credit unions are generally showing strong growth, Filene’s Bell says.
“2014 was a great year,” she says. “Loan growth was up quite a bit. … Member growth was up.”
Cornerstone’s Hui expects that success to carry into 2015.
“The larger credit unions will continue to be successful,” Hui says. “I think they have a very good value proposition for consumers in terms of good products, very good pricing, with either higher deposit rates or lower loan rates.”
There are some broader trends that could help credit unions do well in 2015, Hui says:
- Increasing awareness about what credit unions are and the potential benefits they offer.
- Transactions shifting from branches to the Internet, allowing for larger credit unions to compete for customers without needing to have the massive branch networks of the biggest commercial banks.
Credit unions are also beginning to make progress in cooperating with one another to share costs so they can avoid having to do a full merger with another credit union, Bell says.
“You see some success with credit unions, sharing a (chief financial officer) or even sharing some of the compliance costs,” she says.