ALPHARETTA, Ga.–With the Federal Reserve announcing its Bank Term Funding Program (BTFP) will cease making new loans on March 11, will the credit unions that have turned to it be able to manage through what is expected to be a continuing liquidity challenge this year and next?
Or might the turning off of the tap contribute to an increase in pace of credit union mergers? One expert is concerned about both questions and believes the CU community could be “in a pickle.”
Robert Colvin, president and chief strategist at CU Capital Market Solutions, said credit unions have turned to the BTFP more often than banks.
“The key thing here is the Fed announced their emergency line of credit is ending, which they had set up when the Silicon Bank fiasco occurred last year to quiet all the noise about people moving deposits in the banking industry—particularly the large movement of funds,” Colvin explained. “So, they quieted that down when they made lines of credit available for any liquidity concerns that came up.”
As Colvin noted, the Fed liquidity resource allowed FIs to borrow with their existing securities valued at par, even if under current accounting standards they would have been considered underwater.
“The Fed made this special condition, and they've done this before. They did it during the pandemic and they've done it and under certain stress events,” he explained.
A ‘Big Deal’
Despite the market being aware the Fed intended to sunset the Bank Term Funding Program at some point, Colvin emphasized, “This is a big deal.”
“Credit unions have few options outside of their members for raising deposits. You can belong to the Home Loan Bank and raise money that way. If you're low-income designated, you access the brokered CD market,” he explained. “The Federal Reserve made this line open to any financial institution regardless of their size.”
Colvin pointed out 307 credit unions, as of the last call report cycle, had accessed the Fed facility.
“And the total borrowing was $34.9 billion. That is significant,” he said.
Colvin explained the percentage of CUs using the window, compared to the overall number of CUs, is higher than the percentage of banks that have accessed it.
“So, a year from now, for many credit unions, that money has to be replaced,” Colvin said. “Well, looking at America’s Credit Unions’ forecast for the industry, their projections are for deposit growth being flat in 2024. You've got $35 billion, roughly, that's going to have to come out in early 2025. Where does this money come from?”
High on the List
Colvin reminded that a recent NCUA Letter to Credit Unions has liquidity high on its list of areas where the agency will be focused.
“In that document they cite an increase in the number of three-, four- and five-CAMELS rated institutions,” Colvin said, and a primary reason is the stress on liquidity.
“The value of their investment portfolio has declined significantly,” he said. “The liquidity component has definitely been stretched, as everybody has used lines of borrowing and increased their brokered deposits. Most of the CAMELS components are directly affected because of this significant rise in interest rates…A concern in the industry, from an interest rate risk perspective and liquidity perspective, is a line of credit that people have depended on to the tune of $35 billion is going away. And you're going to have an imbalance of growth between deposits and loans. It just seems like the industry is in a pickle here.”
Colvin said he has seen contingency funding drawn down, and in some of his company’s clients that has placed pressure on the liquidity component. Also, citing data from Chip Filson on his blog (chipfilson.com), Colvin noted that credit unions are not taking advantage of the Central Liquidity Facility. Colvin noted the CLF has initiated no new loans since 2009.
‘Choppy Waters’
To navigate what he called “pretty choppy waters,” Colvin said credit unions need to be thinking very carefully about their liquidity planning for 2024.
“They probably need to rethink their liquidity planning. I am sure contingency funding plans in their policies are getting stretched,” he said. “They have to run ‘what-if’ scenarios. And, they have to be very disciplined with a lot of focus on their asset liability management and their contingency plans. Also, you've had interest rates at near zero for the last couple of decades. So, many credit union people have never seen, or have had to manage through, something like this before. It's a brewing problem and certainly the NCUA is well aware of it.”
In response, Colvin added that Capital Markets this quarter will introduce its Capital Markets CD, which allows CUs to get term funding.
Written By: Ray Birch