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.
As the acceptance of external funding has improved, credit unions are increasingly sourcing funds from many channels, including the Federal Home Loan Bank System, the corporate credit union network, and several non-member deposit channels, such as public fund deposits.
Yes, public fund deposits are being increasingly sourced to fund credit union assets.
Increasing Growth, Benefits, And Uses
Total member and non-member government deposits totaled $5.4 billion at year-end 2017. This is an increase of 27% since 2015. While this amount pales in comparison to total deposits and other liabilities, how important are these deposits to the nearly 500 credit unions who report them?
Many of these credit unions are strategically pursuing public fund deposits as these deposits are an additive funding source from outside the industry. These deposits provide stability as they are not subject to the liquidity strain that can occur across the entire credit union and banking industry. Additionally, they mitigate the seasonality of consumer deposits and support core deposit metrics.
When pursuing a matched book asset liability strategy, public fund deposits offer a compelling and economically sound funding source for select loan portfolios while preserving your existing credit lines. The amount and term of a public fund deposit can be structured to closely match a member business loan origination. Or, the deposits can be used to fund an unsecured loan portfolio or a specific vintage of originated of auto loans.
Acquiring Public Fund Deposits
But, you ask, how are credit unions accepting public fund deposits? Public fund deposits are largely controlled by state statutes for both the depositors and deposit takers. When these statutes were initially created, the credit union industry was largely cut out, and public unit depositors were limited to FDIC-insured institutions. Much like the taboo of using external funding, many credit unions think they are completely locked out of the public funds market. But that is not true.
The great news is that efforts to facilitate public fund deposits to credit unions are paying off. Many states now allow government entities to deposit funds in credit unions. Additionally, there are states that allow their government entities to place their deposits nationwide.
So, consider a federally insured and chartered credit union in Florida or Ohio accepting public fund deposits from multiple government entities from Minnesota. This is happening.
Looking At Collateralized Options
While credit unions may find the NCUSIF insurance limitation restrictive for raising external deposits, several states allow collateralized deposit options. Using excess collateral at a Federal Home Loan Bank or the Federal Reserve Bank are a couple of options for collateralizing deposits. Or, credit unions could work directly with their safekeeping agent on possible collateral arrangements. Lastly, these states may also allow a public fund deposit to be supported by a letter of credit issued from a Federal Home Loan Bank.
Serving Our Local Communities
Credit unions restricted on a local level continue to lobby legislators to modify rules and statutes to expand the deposit market to credit unions. This is a growing need, as smaller communities with local and state government operations have lost bank presence in their community and thus access to local financial services. The desire and willingness of public fund depositors, and their aggregators, to place deposits with credit unions will certainly promote further change.
Overall, continued growth of public fund deposits in credit unions will further support our position as a viable and, in some cases, preferable deposit taker for local government entities.
Learn how your credit union can take advantage of public fund deposits in this on-demand webinar: Public Fund Deposits And Your Credit Union.
Perry Jones is VP, Portfolio Manager, at Corporate One FCU