The Federal Reserve has raised interest rates yet again, but credit unions' savings rates continue to lag, and that could spell trouble in the long term, according to one economic expert. But analysts are divided on whether credit unions are setting themselves up for a liquidity crunch.
"This has been a trend that has been developing all year. It reversed in September, but now it's back," said CUNA Chief Economist Bill Hampel. "We have decent loan growth, but we have incredibly weak savings growth."
And while savings growth is somewhat weak across the financial services board, this weakness could be exacerbated by what credit unions are doing-or not doing-in the wake of rising interest rates, he said.
"Credit unions are attempting to protect their bottom lines by not raising savings rates as quickly," Hampel observed, noting that CUs aren't simply lagging behind the Fed, which would be expected, but they are also lagging behind the market, which could lead to slower savings growth at credit unions compared to the rest of the financial services arena. "I have pleaded with them not to do this. They don't need to worry about their bottom lines because they have excess capital."
And the problem, Hampel explained, is that in continuing to lag the savings rate market, credit unions could end up doing themselves more harm than good, keeping their share growth preternaturally low. Additionally, it could mean credit unions end up paying lower or fewer dividends to members.
Eroding A CU Mainstay
The other problem is that it erodes one of the mainstays of the credit union reputation: better rates for members.
"There's definitely some margin management going on there, and you can't make a blanket statement that it's a good or bad strategy," said Callahan & Associates' Jay Johnson. "But there are now some very aggressive competitors out there with some very aggressive rates. They are using rates as their lead-in. This is tough for credit unions because rates are what we're known for, it's our competitive advantage, but it's getting a whole lot harder to compete on rates. Credit unions are lagging a bit, and we're losing that rate advantage that we have traditionally had."
It's not as if all savings-related rates are lagging. Longer-term vehicles like CDs have been rising nicely at CUs, both Hampel and Johnson agreed, but the real bulk of credit union savings-money market accounts and regular share accounts-have been slow to rise.
But this, Johnson offered, is not all that surprising, if you look at how credit unions have moved their rates historically.
"Credit unions have always tended to be laggards when rates change-up or down," he noted. "It is not atypical that this is occurring. But as rates continue to go up, it should be an opportunity for credit unions to reassert their rate advantage."
While higher rates often mean slowing loan growth, that largely hasn't been the case.
"If you look at the loan portfolio, according to our First Look data for third quarter, loan yields continue to be below where they were a year ago, but we are seeing that starting to pick up again, they are seeing some lift. Loan growth continues to be pretty strong."
And that could lead to another problem if credit unions continue to keep their savings rates low: a liquidity crunch. "What might happen is that they could begin to run low on loanable funds," Hampel suggested. "Then they may have to raise their rates on shares just to get funds to loan out."
Sophistication Evident
But Johnson said he believes such a scenario is unlikely. "Credit unions are becoming much more sophisticated in their funding," he said. "They'll be borrowing from corporates and taking other measures. I don't see it restraining growth."
He agreed that credit unions certainly can afford to raise their savings rates.
"There is room to move," Johnson offered. "Overall, credit unions are well capitalized. You don't want to hurt your financial position by trying to compete on rates, but if you look at the big numbers, generally speaking, there is room to move."
