Why Credit Unions are Still Safe and Sound Despite Recent Issues with Silicon Valley Bank and Signature Bank
On March 10, 2023, Silicon Valley Bank (SVB) collapsed. Two days later, Signature Bank suffered a similar fate. The failures at SVB and Signature were two of the three biggest in U.S. banking history, following the collapse of Washington Mutual during the 2008 financial crisis.
While these failures may create consumer concerns about the financial industry, it’s important to remember that this situation does NOT include any credit union failure. Credit unions have always been, and still are, extremely safe and reliable options for your financial needs. Read on to learn about why these banks collapsed and what this means for credit unions.
Why did Silicon Valley Bank and Signature Bank Collapse?
In simplest terms, both of these collapses were the result of “bank runs”, where too many depositors withdrew their funds at the same time out of fear of insolvency.
Two days before the collapse of SVB, CEO Gregory Becker sent a letter to shareholders informing them that SVB lost $1.8 billion on the sale of U.S. Treasurys and mortgage-backed securities. At the time, he indicated the bank planned to raise $2.25 billion to strengthen its finances. This announcement was not received well by customers, who collectively withdrew $42 billion from their accounts on Thursday, March 9. By Friday morning, SVB had a negative cash balance of $958 million. The FDIC stepped in and took over SVB, establishing the new Silicon Valley Bridge Bank, N.A.
On Sunday, March 12, a similar bank run happened at Signature Bank in New York, primarily known as a lender serving real estate and law firms, and more recently the cryptocurrency industry. New York regulators closed the bank, and the FDIC took over the same day and established the new Signature Bridge Bank N.A.
Without swift government interference, these collapses could have been even more disastrous for depositors with large accounts. The FDIC insures deposits up to $250,000, regardless of the type of account. However, in the case of SVB, more than 90% of their deposits were above $250,000 - so not insured by the FDIC. Luckily, the U.S. Government made an exception and agreed to make all depositors at both SVB and Signature Bank whole, and the payouts will not be at the expense of taxpayers.
What does this mean for credit unions?
Credit unions operate under a different business model than banks. They are not-for-profit institutions, which means that they are owned and operated by their members, rather than by shareholders. This structure allows credit unions to focus on their members' needs, rather than on generating profits for shareholders.
Credit unions are also subject to stringent regulatory oversight, just like banks. They must comply with regulations set forth by the National Credit Union Administration (NCUA), which is an independent agency of the federal government. The NCUA works to ensure the safety and soundness of credit unions by monitoring their financial performance, conducting examinations, and providing guidance and support to credit unions.
In addition, credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF), which is backed by the full faith and credit of the United States government. This means that if a credit union were to fail, members would be reimbursed up to at least $250,000 per individual depositor - the same as any other federally insured financial institution (including banks). As of today, credit union members have never lost a penny of insured savings at federally insured credit unions.
The NCUA’s Chairman Todd Harper had this to say about the current situation, “The credit union system remains well-capitalized and on a solid footing. The National Credit Union Administration continues to monitor credit union performance through both the examination process and offsite monitoring, and it will continue to do so into the future.”
In short, credit unions are safe and sound. They operate under a different business model than banks, with a focus on their members' needs rather than generating profits for shareholders. Credit unions are subject to stringent regulatory oversight and are insured by the NCUSIF. While incidents like those involving Silicon Valley Bank and Signature Bank may cause concern, it is important to remember that credit unions are extremely safe and reliable options for your financial needs.