Liquidity Crunch Will Put Pressure On CUs' Underwriting, Efficiency

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LAKE BLUFF, Ill.-The financial industry's contracting "money supply" will require credit unions to make critical business decisions in the coming year.

CUs will have to tighten underwriting standards, become more efficient, and be prepared to move rates higher when money market mutual funds eventually increase their returns.

That is the stance of Mike Moebs, CEO/economist of economic research firm Moebs $ervices, who told Credit Union Journal that the contraction in money supply is resulting from a shift in long-term stable deposits to less-stable savings accounts. "In the first quarter of 2009, the bank and credit union supply of money was at $13.76 trillion," said Moebs. "Since then, it has fallen for five straight quarters, through June 30, to $12.85 trillion. This is a reduction of 6.6%."

Moebs reminded that money supply at CUs is primarily checking accounts and insured deposits such as certificates CDs-the fundamental fodder used to lend to small businesses and consumers.

"This is very serious," said Moebs, who also is the author of a study on money supply. "We have been tracking money supply since the data first became available in 1959, and never before has there been a contraction for this long. Comparing this downward trend to data available around the Great Depression, shows we are in a comparable period."

Bank and CU Money Market Accounts (MMAs) have grown from $4.09 trillion to $5.08 trillion from the end of 2008 to June, 2010, which is a 24.3% increase. The combined reduction of jumbo and retail CDs at $1.07 trillion matches the increase in MMAs.

What CUs Need To Do

What do credit unions need to do as a result? Moebs believes since unstable MMAs could move out of an institution quickly, to possibly money market mutual funds when returns improve, it could force CUs to borrow to fund a portion of their loans. "Therefore, credit unions have to tighten underwriting standards to avoid bad loans increasing their expenses," asserted Moebs. "And with already razor-thin margins, and the loss of revenue on the horizon from the new interchange rules, the credit union must know that the people it lends to are those that will keep their costs down."

At the same time, the money supply contraction is simply forcing credit unions to be more efficient. While CU operational efficiency has improved over the last few years, Moebs believes the industry is "nowhere near where it needs to be." Moebs compared what is facing credit unions to what faced the American farmer over a decade ago. "In the past 10 to 20 years, the American modern farm has tripled its efficiency and substantially reduced expenses. Credit unions must do the same things the farmers did-go to modern farming. They must become incredibly efficient. If they do that, in the long term they can conquer this. But if they don't, they are just setting themselves up to be merged."

Credit unions also have to be prepared to move deposit rates higher when money market mutual funds eventually improve their returns. "If credit unions see the market moving, they have to go lock step with the money market mutual funds, which they have not done in the past," insisted Moebs. "They can't afford to have any of the money leave. They have their competitor on their knees and can't allow them to stand up."

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