Credit unions are facing a liquidity challenge, and there are no easy answers.
The loan-to-savings ratio is currently 86%, its highest level in 40 years, Bill Hampel, an economic consultant, said last week during the CU Leadership Convention in Las Vegas. It has increased over the past six years largely because of loan growth, he added.
“Since 2012, credit union lending has doubled, led by a huge increase in auto lending,” Hampel said. “Loan demand is likely to slow even without a recession, because the auto market is slowing.”
This ratio could get even higher – Hampel predicts it could reach 87.5% by the end of 2020.
This is complicated by the fact that the savings market is “not normal” after almost 10 years of low interest rates, Hampel said. Large banks are also more aggressively pursuing retail deposits to meet standards laid out in Basel III. Overall, CU deposit growth has “held up” compared to other depository institutions despite this competition, he said.
Besides concerns of around liquidity, credit unions are looking at a potential recession.
“Will we have a recession?” Hampel said. “Yes, and that is an easy answer. When? Hard to say.”
According to Hampel, the U.S. economy is “more fragile” than it has been in years. As has been covered intensely in recent months, the yield curve is currently inverted. Since World War II, every time short-term interest rates have gone higher than long-term rates for two months, a recession has followed.
However, he added, those who are saying there has to be a recession simply because it has been 10 years since the last recession are missing the point.
“Economic expansions do not die of old age, it takes an external shock – such as the oil market in the 1970s, or the housing crisis in 2008,” he said.
Hampel was speaking the day the Federal Reserve Board lowered interest rates by 25 basis points. He said the rate cut could mean the Fed is trying to “preemptively stave off a recession,” or “trying to keep the guy down the street to stop yelling at them so much,” he quipped.
“The economy did not make the rate cut happen, the financial markets did. The best way to deal with a liquidity crunch is to hope for a recession, soon,” he joked. “During a recession, people save more and borrow less.”
Hampel said a credit union’s response to tight liquidity depends on its capital. If the CU is well capitalized, it can sell loans as participations, or offer CD specials to bring in funding. Credit unions with a weaker net worth may not be able to take either of those steps because both options are expensive. Instead, some institutions could temper loan demand with higher interest rates.
“In either case, credit unions can encourage deposit growth by active marketing of savings, rather than marketing their loans,” Hampel said. “They also could offer business services, which bring in deposits, or increase their rates on both sides of the deposit sheet. Another option is to use excess share insurance, which can help retain funds in a troubled economy.”
