“If you’re a depositor at Silicon Valley Bank, and you start to see this trouble and you know most of your deposits are uninsured, you have an incentive to run, which begins that liquidation,” Vossmeyer said. Because of this cap, 94% of SVB deposits were uninsured. SVB was vulnerable to depositor flight because companies and well-heeled savers kept millions of dollars in their accounts with the bank, exceeding the Federal Deposit Insurance Corp.’s coverage limit of $250,000. But why would potential buyers pay for these low-yielding bonds when newer bonds offer more attractive rates? That’s why SVB had to unload those assets at a discount. To let people cash out, SVB needed to sell its long-term bonds. Fearing for SVB’s viability as investment losses mounted, depositors panicked and withdrew their funds. Here’s what happened: As the Federal Reserve raised interest rates, older bonds lost value because newer bonds paid out higher rates, pummeling the investments these banks had made. Could a Silicon Valley Bank-style meltdown happen at a credit union?īank failures dominated the news earlier this year after the collapse of Silicon Valley Bank, which suffered a run that forced it to sell its long-term securities at a loss. He noted that if a credit union does fail, it might be due to incompetent management or theft - there are cases in which employees have absconded with the institution’s cash. “Now, at a credit union, you tend to be paid much less, so you don’t have a lot of incentive to take that much risk because you don’t profit a lot,” Zingales said. “So you can see very different risk profiles in terms of the asset side,” Vossmeyer said.īanks are trying to maximize their return on equity, and that can lead them to take bigger chances with their lending or investments, said Luigi Zingales, a finance professor at the University of Chicago Booth School of Business. In comparison, only about 4% of mortgages at credit unions were subprime. “But in general, credit unions are more risk averse.”īefore the 2007-08 crash, more than 23% of mortgages at commercial banks were subprime, which are risky because they’re offered to those with bad credit and come with higher interest rates. So if a certain asset class loses value, it can affect both banks and credit unions,” Vossmeyer explained. “Credit unions still manage complex balance sheets like banks do. But one upside with credit unions is that they’re less likely to make risky investments. Put into context, the rate of failure at both types of institution is low. The differences between credit unions and banks While the crisis has subsided, Wall Street investors have expressed concern about the state of the country’s regional banking system. This year, Silicon Valley Bank shut down after a run on deposits, followed by Signature Bank and First Republic. In 20, a total of about 300 banks imploded. In 2007, there were just three failures, which jumped to 25 in 2008. Bank failures soared during and after the mortgage-driven financial crisis. So banks are also secure, generally speaking, but as we’ve seen in recent history, there are periods of instability that expose their vulnerabilities. Vossmeyer pointed out that two to three banks, on average, have failed per year since 2017 of the more than 4,100 operating. In total, there are about 4,800 federally insured credit unions in the U.S. Conservatorship means that the NCUA has placed a credit union under its control due to operational issues, while a liquidation means the credit union has been shut down. And deposits up to $250,000 at federally insured credit unions are guaranteed, just as they are at banks.Īngela Vossmeyer, an associate professor of economics at Claremont McKenna College, said that data from the National Credit Union Administration shows that six to seven credit unions, on average, have entered conservatorship or liquidation annually since 2017. These financial institutions are not-for-profit cooperatives owned by their members and focused on their communities’ needs, while banks are for-profit enterprises.Įxperts told us that credit unions do fail, like banks (which are also generally safe), but rarely. Do, in fact, credit unions fail, and we just don’t hear about them because they’re too small? Or is there something inherently different about the way credit unions are structured and operate that make them much less likely to fail? Is my smug security misplaced? Īs I listen to the many reports about bank failures, I can’t help but feel smugly secure that I do all my personal banking with credit unions (including mortgages, credit cards, car loans and certificates of deposit). Ever wondered if recycling is worth it ? Or how store brands stack up against name brands? Check out more from the series here. This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small.
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