ATLANTA—A new funding and liquidity option is now available to help low-income designated CUs actively manage their balance sheet and grow, giving LICUs access to an almost limitless source of deposits.
CU Capital Market Solutions, LLC (CMS) reported LICUs can now receive non-member deposits through a funding program it has developed that it said is specifically designed for maximum ease and utilizes NCUA pass-through insurance regulations.
CMS recently acquired the assets of CNBS, the one-time CUSO of U.S. Central Credit Union.
The CUSO launched the program Aug. 8 when Jefferson Financial Credit Union of Metairie, La., received the first non-member deposit of $5 million. Jefferson Financial received the lump sum deposit of $5 million at a cost of 65 basis points, with no additional fees or collateral required, according to the company.
“It marks the first time credit unions have had access to a funding source of this kind,” CEO Lew Lester said. “To date most credit unions have taken deposits from members only. Now, with changes to regulations, LICUs can accept non-member deposits up to 20% of their total share balances.”
Fast Process
Robert Colvin, president and chief strategist, said that when CUs are seeking large sums of non-member deposits, such as the $5 million Jefferson received, it can be an “onerous” process to do it on their own.
“They have to not only find the investors they also have to find many of them,” said Colvin, adding that each deposit, to be fully covered by the NCUSIF, would be limited to $250,000.
“But with our solution credit unions just open one account with the network’s custodian, which is one of the top ten U.S. banks, and they make a phone call to us and say they would like $5 million, for example,” said Colvin. “That is essentially what Jefferson Financial did. We were able to, in one wire transfer, send them $5 million with the credit union having to do very little work. They did not have to go out and find 20 different investors to deposit $250,000 each. This is a very efficient and fast process.”
Colvin explained that the “institutional cash” market has been open to banks for years but that this is the first time credit unions have been given access. And the reason, he said, is because many large banks want to shed unwanted “hot money” deposits. As a result, the banks have been increasing their fees for large investments from corporations and municipalities that typically reside in checking accounts.
These unwanted deposits, Colvin added, have come under regulator scrutiny as attention to money that can move quickly has increased post-recession.
Banks Dodging Deposits
Finalized last September and overseen by the Federal Reserve and other regulators, the rule involving bank liquidity coverage ratio forces banks to hold high-quality liquid assets, such as central bank reserves and government debt, to cover projected deposit losses over 30 days. Banks must hold reserves of as much as 40% against certain corporate deposits and as much as 100% against some deposits from hedge funds, the Wall Street Journal reported.
“At some point you wonder whether there will be a shortage of financial institutions willing to take on these balances,” Kelli Moll, head of Akin Gump Strauss Hauer & Feld LLP’s hedge-fund practice in New York, told the Journal.
“Basically the regulations make it too onerous on the big banks to keep all the corporate cash,” said Lester. “We have all this money sloshing around—trillions of dollars—and now we have LICUs that would love to have this funding, especially since they can get it with one phone call and through one deposit. Credit unions want to grow and this is a mechanism to do that.”
Colvin explained how NCUA pass-through insurance covers deposits—such as the $5 million held by Jefferson financial—through this network.
“The $5 million held by Jefferson Financial is not $5 million from one depositor made through our custodian. It was really $250,000 each from 20 institutional depositors looking for insurance coverage,” said Colvin, explaining that the NCUSIF is covering each of the 20 deposits separately.
Account Custodian
Colvin said that if Jefferson Financial failed, NCUA would first go to the custodian of the account.
“The books and records of these 20, $250,000 deposits at Jefferson are being kept by the custodian, not the credit union. The insurance goes through Jefferson Financial, through custodian, and onto the depositors.
Lester noted that since the financial crisis, low-income designated credit unions have been lending to people of low and moderate income at a pace faster than that of banks. He said that in many cases many of these CU lenders’ loan demand is outstripping their deposits.
“You have major cities and municipalities that want their money insured, and all of this corporate money can now filter down to these small community FIs across the country to make loans to local entities,” said Lester. “This is an efficient way of distributing this cash and putting it to work to help communities across the nation.”
Lester said the rate being paid on the money market account will vary with the market, but is commensurate with a Federal Home Loan Bank short-term advance.
Money Movement
Colvin pointed out that since the deposits reside in an MMA, credit unions can send back the money at any time and investors can pull it out. But, he said, CUs should not be concerned over investors taking out their cash, as the network of institutional investors is large.
“So Jefferson receives one lump-sum deposit of $5 million that’s comprised of at least 20 different institutions in an amount less than or equal to $250,000, so that each deposit is fully insured. Our experience to date suggests that this money is extremely stable given the number of investors in the network and the amount of funds seeking to be insured. The movement of money in and out of the network is handled by the custodian. If one depositor makes a withdrawal from the network the custodian can replace those funds with another depositor.” said Colvin.
Lester said that CUs are showing interest in the funding source.
“Numerous credit unions ranging from $2 billion to $100 million have asked to open an account,” said Lester. “Thousands of investors on one side are trying to place money, now thousands of credit unions can take those dollars.”