Credit unions’ exposure to climate-change impacts identified in agency ‘research note’

Agency board poised to seek public input on climate-related financial risk

A “research note” that illustrates credit unions’ exposure to climate-related physical risks – with about one-fourth of insured credit unions reportedly found to be in areas with high or very high risk of negative impacts from natural disasters – was released Wednesday by the National Credit Union Administration (NCUA), whose board is slated to take up the topic in Thursday’s open meeting.

The research note (“Estimating Credit Union Exposure to Climate-Related Financial Risk”), produced by the agency’s Office of the Chief Economist, used year-end 2021 credit union call report data and the Federal Emergency Management Agency’s (FEMA) National Risk Index. The agency said its findings include:

  • The 25% of credit unions that are in communities at relatively high or very high risk of experiencing negative outcomes from natural hazards accounted for 34% of system-wide assets, or approximately $750 billion, at the end of 2021.
  • Minority depository institutions face a substantially higher risk than the credit union system in aggregate.
  • Credit unions most at risk of negative outcomes due to natural hazards tend to be located in coastal areas, particularly in California, Texas, and Florida. Together, these three states account for 11% of credit unions located in communities with an elevated risk and 22% of credit union assets.

The research also looked at credit union system exposure to specific natural disaster risks, focusing on the 10 most costly natural disasters based on FEMA’s estimates of expected annual losses. Roughly half of credit union assets, the NCUA said, are in areas at a relatively high or very high risk of experiencing a natural disaster due to tornado, and a similarly large share of credit union assets are in areas exposed to strong winds.

Just looking at the risks to credit unions in California, Texas, and Florida, the paper provides textual and graphical illustrations of the distribution of credit unions in terms of institutions; assets; loans; deposits; as well as members. It notes that:

  • In California, 48% of credit union headquarters and branches are located in very high-risk communities and another 44% are located in relatively high-risk communities. Together, these credit unions account for over 90% of members, assets, loans, and deposits of California-based credit unions. It adds that all MDIs and low-income designated credit unions (LICUs) in California are at an elevated risk.
  • In Texas, 30% of credit unions are in relatively high-risk communities and 24% are located in communities at very high risk. These credit unions account for over 80% of members, assets, loans, and deposits of credit unions with headquarters or branches in the state. MDIs are even more vulnerable, with 73% located in relatively high-risk or very high-risk communities in Texas. Also, 51% of (LICUs) have headquarters or branches in these high-risk communities.
  • Of the credit unions with headquarters or branches in Florida, 16% are in very high-risk communities and 39% are in relatively high-risk communities. Together, these Florida-based credit unions account for more than 60% of members, assets, loans, and deposits of credit unions with facilities in the state. MDIs and LICUs located in Florida face greater risk, with 78% of MDIs and 60% of (LICUs) in relatively high– or very high-risk communities.

The OCE described its analysis as a “preliminary” one, focusing particularly on credit unions in three states, and said scenarios would be helpful in “future extension” of the analysis.

“We understand that the Federal Reserve Board is exploring scenario analysis. OCE will be monitoring this initiative with great interest and conducting further analysis of credit union-specific data as additional information related to climate and weather events becomes available,” the paper noted.

NCUA Research Examines Credit Union Exposure to Climate-Related Physical Risks

NCUA Research Note: Estimating Credit Union Exposure to Climate-Related Financial Risk