On January 29, 2020, the NCUA’s revised nonmember deposit rule goes into effect, allowing a credit union to receive public unit and nonmember shares up to 50% of its net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares. This represents a significant increase from the NCUA's current limitation at 20% of total shares.
Nonmember deposits are taking on increased importance for credit unions – a trend that is likely to continue for the foreseeable future.
First, locally-sourced member deposits are simply getting more difficult to come by. Whether credit unions recognize it or not, there is a pitched battle to gather deposits in the local markets. Increasingly, that competition comes from two sources that the credit union industry is not used to seeing. Fintech startups (think Chime, SoFi) that bring advantages to potential customers in terms of the ease of use and cater particularly well to a younger demographic, are gathering assets at an impressive clip. For example, the branchless digital bank Chime (with no physical locations) passed the 5 million customer mark in September, just four months after it announced that it had quadrupled its user base to 4 million in a single year. And, larger commercial banks (think Goldman Sachs’ MARCUS) are challenging for deposits with aggressive rates. As of November 19, for example, MARCUS is offering 2.00% for one-year money, almost 48bps better than one-year Treasuries. Increasingly, these larger banks are encroaching on credit union turf -- aggressively courting deposits to break into retail banking and as a means to improve the risk weighting of their capital.
Second, following a decade of increasing loan demand, the credit union industry is “loaned out” like never before. Calendar year 2018 closed with the highest loans to shares ratio (85.5%) in the credit union industry’s history. And, while the ratio has retreated slightly over the past three quarters, it remains elevated, and higher than the long term trendline. Needless to say, this liquidity position puts the need for a reliable funding source front and center for many of the nation’s credit unions.
We view the NCUA’s change to increase the limit on nonmember funding as an incredibly forward thinking move by the regulator. And, we offered a comment letter in support of the plan. We continue to regularly suggest that clients get comfortable with the various nonmember funding sources. We have long observed that the most robust business plans take advantage of many potential sources of funding, including a vibrant non-core wholesale funding strategy to handle opportunities where price, availability and/or maturity issues are important. A recent market commentator summed up our approach:
“Once largely thought of as taboo, the use of external funding is now widely accepted throughout the credit union industry. In fact, the NCUA has required all credit unions to seek multiple liquidity sources and document those sources in their liquidity policy.”
Certainly, there has been progress. The balance of nonmember deposits, across the industry, increased almost four-fold over the last five years. But, credit unions have been slower to warm to nonmember funding sources than might be wise. Today’s total nonmember deposits are still less than $13 billion.
The NCUA’s rule change should certainly help to encourage additional utilization of nonmember funding in recognition of “credit unions' growing need for additional sources of funding to serve their members.”
In 2010, the NCUA joined federal bank regulators in issuing a call for diversified funding strategies in an Interagency Policy Statement of Funding and Liquidity Risk Management. We suggest that this document should be given renewed consideration in the current environment. Olden Lane urges all credit unions to consult this guidance and heed its tenets:
“An institution should establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers to promote effective diversification of funding sources. An institution should regularly gauge its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund raising capacity remain valid.”
Against this backdrop, and with several available programs to satisfy nonmember funding needs, it’s high time that credit unions kick the tires on the various options.
 See Perry Jones, Yes, Your Credit Union CAN Use Public Fund Deposits To Fund Assets, Credit Unions.com (May 14, 2018), available at https://www.creditunions.com/articles/yes-your-credit-union-can-use-public-fund-deposits-to-fund-assets/#ixzz5hQRRtvzi
 Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, the Office of Thrift Supervision (OTS), and the National Credit Union Administration, Interagency Policy Statement on Funding and Liquidity Risk Management (Mar. 17, 2010), at 8.