WASHINGTON -
“[Federal Reserve Chairman] Bernanke is still saying that he sees a slow down, not a recession,” said NAFCU Economist Dr. Tun Wai. “It’s the whole business of confidence and how people react in terms of spending saving. At the very least, it implies that income levels won’t grow as fast, and it implies that consumption patterns and borrowing patterns will not be as robust as they used to be. This is a time when credit unions really need to be aware of what their members are doing.”
While the Fed’s action was intended to stave off a recession by encouraging more people to borrow, the jury is still out as to how successful that strategy will be, noted CUNA Economist Mike Schenk. “Consumers are being asked to step up to the plate when they are already up to their eyeballs in debt,” he said. “We are asking heavily indebted people to borrow more. They may not want to, and if they do, they may simply be digging the hole even deeper. The good news is that most credit unions are perfectly situated to do this. They are sitting on a fairly large pile of capital, so they would be in a position to accept more risk than they have.”
But that doesn’t mean they’ll do it, he added. “There is more risk in the credit union balance sheet already,” Schenk observed. “I sit on a credit union board, and any time we talk about capital going down, it gives us pause. If credit unions take this approach, they need to do it with eyes wide open and in a planned manner. I’m OK with capital of 12% going down to 11% given the situation. But when you talk about lowering capital, it comes with a lot of hand wringing and a lot of browbeating.”
If nothing else, credit unions can take a look back at recent history for pointers on what to expect going forward, Wai suggested, “If you look back at 2001, there was a real flight to quality, a flight to safety,” he related. “What happens is that suddenly your price advantage over banks doesn’t matter as much as the income and situation of your members. Are they being laid off? What else is going on with them? If we end up using the ‘R’ word, then you’ll see them pull back even more. If the market gyrates as crazy as it has been, they will keep their money where it is and not move it into the stock market.”
The key, he said, is not counting on keeping that cash on hand for long. “In 2001 we saw a spurt in savings wherever the consumer had direct deposit. But you have to be very careful,” Wai advised. “Reassess your pricing strategy, You have to ask is there permanence in your saving component, because if the money comes you have to worry about it walking out the door later when some of these things start to resolve.”
As a result, Wai said the real impact of the rate cut on lending may have less to do with an increased loan demand and more to do with just how loans are funded. “Credit unions are going to see money coming in and will want to loan that out, but they need to be aware that that funding source could dry up quickly as the economy improves,” he explained.
Credit unions also need to be wary of some of the loan applications that will come their way as banks continue to tighten their loan standards. “What we’re hearing banks say is that they will continue to make loans to customers they have already been doing business with, but new customers are going to have to prove their profitability, to show that they will buy other products,” Wai related. “Credit unions still haven’t had to tighten their lending standards, but that means they are going to look even more closely at someone’s ability to repay a loan. They don’t want to make loans that, if we go into the ‘R’ word, they end up defaulting.”
