PLANO, Texas - As economic stimulus checks and tax refund checks hit mailboxes, the question credit unions should be asking themselves right now is, “is it time to reprice our savings accounts?”
That was the question posed by Southwest Corporate FCU, which suggested now might be a good time for credit unions to lower their cost of funds.
The economic stimulus checks are a gambit by the federal government to boost the sagging economy. As Credit Union Journal has reported previously, what remains to be seen is how consumers will use those checks, ranging in size from $300 to $1,800 for approximately 130 million Americans.
According to Southwest Corp, if preliminary surveys play out, only 20% to 25% of these consumers will spend their checks; the remainder will deposit funds to beef up their savings balances or pay down debt. That means a flood of cash may be making its way into credit unions about now.
“With lending sluggish, liquidity high and low interest rates suppressing earnings on investments, how should credit unions respond,” Southwest asked. “Large inflows of cash, as in the case of consumers depositing economic stimulus checks, are the kind of anomaly that can negatively impact a credit union’s bottom line if the credit union has not been vigilant in adjusting interest rates relative to earnings.”
“If credit union capital is low and investment earnings are renewing at rates lower than those being paid on member dividends, large cash inflows will only exacerbate the move toward negative earnings,” Mark DeBree, Senior ALM Analyst, said. “Credit unions should determine whether dividend schedules are reasonable based on earnings in the current interest rate environment. Some credit unions are reticent to cut cost of funds, because they want to provide the greatest value for their members. But maintaining share rates that are too high can result in negative earnings and jeopardize the credit union’s financial condition. While credit unions can’t ignore what competitors are paying on deposits, it should not be the sole determinant in setting deposit rates.”
But even as credit unions gear up to take in these funds, they shouldn’t expect them to stick around forever.
“Funds from economic stimulus checks will inflate balance sheets for awhile, but aren’t likely to stay in credit unions long,” said Mark Cough, Senior ALM Analyst at Southwest said. “There is no one formula for success. We tailor solutions to a particular credit union and have the ability to handle any financial situation, no matter how complex.
“To a credit union with high loan demand, a high loan-to-share ratio and ample liquidity, this may just be a blip on the radar. Otherwise, the influx of potential short-term cash could lead to earnings, liquidity and/or capital adequacy concerns.”
