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VIP Focus: What You Should Know About Credit Unions for Public Funds

DashBoard, Nov. 18, 2015

As many of you know, the changing banking regulatory environment, namely in the form of Dodd-Frank Act and Basel III, is forcing larger banks to turn away public fund deposits. This fact, coupled with historically low interest rates, is in many states, leading some public agencies to invest in credit unions. Credit unions are currently a permitted investment for Michigan public agencies. Here is what we think you should know about the suitability of credit unions for public funds.

Like banks, credit unions are depository institutions that accept deposits and issue loans. Though credit unions have certain characteristics in common with banks, they are clearly distinguishable from these other depository institutions in their structural and operational characteristics and their expertise.

Generally speaking, credit unions were initially structured and designed to serve a limited local niche, typically based around a corporation, membership group or other like-minded organization, which comprises their “membership.” Credit unions operate by obtaining deposits from “member” individuals and businesses and lending those deposits back out to other “members.” The vast majority of credit unions are small with an average asset size of $41 million.

Certainly the issue of larger banks turning away Michigan public funds is of concern. Perhaps this is a temporary issue as banks digest the new regulatory environment. But given the structural differences of credit unions, here is what we believe should be asked and answered when considering if credit unions are suitable for Michigan public agency funds:

  1. Do credit unions have both the systems and expertise to manage these deposits?
  2. Do credit unions have a strong history of managing a large public funds deposit book successfully through cycles? This will be of even greater importance should interest rates begin to rise!
  3. What proportion of a credit union’s total deposit base would public fund deposits represent?
  4. How many dollars in liquid and short-term assets would a credit union have to cover the deposit?
    • Liquid assets = the sum of interest-bearing bank balances + federal funds sold + securities purchased under agreements to resell + debt securities with a remaining maturity of one year or less
    • Short-term assets = the sum of interest-bearing bank balances + federal funds sold + securities purchased under agreements to resell + debt securities with a remaining maturity of one year or less + loans and leases with a remaining maturity of one year or less

For more specific questions regarding this subject, please feel free to contact us at info@michiganclass.org.


VIP Focus articles are company-sponsored advertisements and do not necessarily reflect the views or positions of MASB. It’s intended to provide Very Important Partners with a space to share information of value to you and your district.

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