Climate change poses a threat to US credit unions, warns regulator

Credit unions most at risk are those serving socially and economically disadvantaged communities, says the NCUA report

A report from the US National Credit Union Administration (NCUA) warns that a quarter of the country’s federally insured credit unions are at risk from national hazards.

The regulatory body’s Office of the Chief Economist (OCE) warns in its report, Estimating Credit Union Exposure to Climate-Related Physical Risks, that “weather and climate-related disasters pose significant risks to providers of financial services, including credit unions”.

Credit unions serving disadvantaged communities are most at risk, it adds.

Compiling the report, the OCE paired credit union data the National Risk Index (NRI) compiled by the Federal Emergency Management Agency (FEMA). This measures a community’s vulnerability to the negative effects of 18 natural hazards.

OCE found that roughly one quarter of federally insured credit unions, accounting for one-third of system-wide assets, are located in communities classified as having relatively high or very high risk of experiencing negative effects due to natural hazards.

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Minority depository institutions (MDIs) – depository institutions where 51% or more of the stock is owned by one or more “socially and economically disadvantaged individuals – “face a substantially higher risk than the credit union system in the aggregate”, it adds.

Just over half of MDIs are at relatively high or very high risk of experiencing negative effects from natural hazards.

“These findings are consistent with the literature on vulnerable communities that shows natural disasters have disproportionate negative effects on their health, wellbeing, economic security, and mobility,” says the report. 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.

Related: Woccu issues credit union guide to global rules on sustainable finance

According to the NCUA, there were three main findings highlighted in the report:

The 25% of credit unions based in communities at relatively high or very high risk of negative outcomes from natural hazards accounted for 34% of system-wide assets, or approximately $750bn, at the end of 2021.

This can prove terminal for some credit unions on the frontline. The report says that Hurricane Katrina led to the closure of two credit unions located in areas that took a direct hit from the storm in 2005: Orleans Public Schools Federal Credit Union and Chalmette Refinery Federal Credit Union. In both cases, employees and members were displaced across the country.

“This insightful research shows that credit unions are not immune to climate-related financial risks and that the costs and number of climate-related natural disasters is accelerating, often hitting disadvantaged communities the hardest,” said NCUA chairman Todd Harper. “By measuring, monitoring and mitigating such risks, the NCUA can fulfill its core obligations of maintaining the safety and soundness of credit unions, protecting consumers and safeguarding the National Credit Union Share Insurance Fund.”

 In 2021, the United States experienced 20 separate billion-dollar weather and climate disaster events, which caused an estimated $153 billion in damage. The frequency and cost of these events is on the rise. 

According to the NCUA report, the costliest natural hazards for credit unions are tornados, strong winds, ravine floods and earthquakes.

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