Credit union regulator outlines ‘warning signs’ in midyear data; interest rate risk, rising delinquencies among them

Warning signs for credit unions include interest rate and liquidity risks, rising delinquency rates, growing balances on home equity lines of credit and other second liens, and increasing net charge-off ratios, the chairman of the board of their federal regulator said Tuesday.

Commenting on midyear performance figures for credit unions released last week by his agency, National Credit Union Administration (NCUA) Board Chairman Todd Harper stressed the need for credit unions to manage their credit risks carefully, including by “proactively” managing interest rate risk.

“The high levels of interest rate risk we are seeing can also increase a credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and put pressure on earnings,” Harper said in remarks to a credit union group meeting in Washington. “Other timely issues, including the reinstatement of federal student loan repayments and rising costs for property and casualty insurance, will also have an impact on already strained household finances.”

Other growing risks to credit unions Harper outlined – which he said were shown over the last few quarters – include credit risk emerging, especially in the commercial real estate (CRE) market and among families with increasingly stressed household budgets.

“Many households are showing signs of significant financial strain, as seen in rising delinquency rates for various loan types, including auto loans and credit cards,” Harper said. “The delinquency rate at federally insured credit unions was 63 basis points in the second quarter of 2023, up 15 basis points compared with the second quarter of 2022. The credit card delinquency rate rose to 154 basis points from 107 basis points one year earlier. The auto loan delinquency rate increased 22 basis points over the year to 67 basis points in the second quarter.”

Harper implored credit union leaders – including executives, supervisors, and boards of directors – to remain diligent in managing potential risks on their balance sheets and monitoring economic conditions and the interest rate environment.

NCUA Chairman Todd M. Harper’s Remarks at the 2023 NAFCU Congressional Caucus