ARLINGTON, Va.-Over the next several years credit unions should pay close attention to signs of a rising-rate environment and prepare to take steps to protect their deposits.
That is the parting advice from Dr. Tun Wai, who will retire Feb. 10 as VP and chief economist at NAFCU. Wai has been at the national CU trade association for 25 years, much of that time spent providing credit unions with economic forecasts, analysis, and guidance to help them manage their way through changing times.
Wai told Credit Union Journal that rising rates could cause CU non-core deposits to head to higher-paying instruments like money market funds and bank CDs as those players increase their rates significantly faster than credit unions.
"With the Federal Reserve extending the low-interest-rate environment to 2014, the challenge to credit unions will come when the Fed changes it policies to a rising-rate environment," said Wai, who noted that CU boards have to meet and discuss dividend policies before rates are adjusted. "Banks will change their rates in a nanosecond."
Credit unions could then be challenged to have enough liquidity to make loans that Wai expects will markedly increase at the time.
Get Members To Lock In
Credit unions should consider pricing strategies now, recommended Wai, to get more members to lock in for longer-term CDs, such as five years. "It will cost you a lot less today than later," said Wai, who also recommended that credit unions more aggressively institute relationship pricing to build loyalty and make members less rate sensitive, and to further focus product and service development on the next wave of retirees, who control much of the country's wealth.
Wai, who holds a PhD in economics from Georgetown University and an MBA in finance from New York University, started at NAFCU 25 years ago as director of research following stints at the World Bank, the Federal Reserve, and the Brookings Institution. "I saw an ad for the NAFCU job in the newspaper, so I applied."
While he was a member of more than one credit union at the time, Wai acknowledged that when he started at NAFCU he did not understand the "nuances" of credit union operations. As he learned more about the things that make credit unions much different than banks, his interest piqued for being part of the credit union community. "I became very intrigued by the kinds of decisions being made at the institutional level," he said.
What became more apparent to Wai, who was later officially named NAFCU's chief economist, is that while many CEOs shared a sound understanding of how the economy was affecting credit union business, boards often did not. Wai said he enjoyed helping directors-often in planning sessions-gain a better understanding of the economy and the forces influencing it, which allowed boards to make better decisions in partnership with CEOs. "I felt is was a great honor to be able to speak to a group of credit union folks trying to decipher, as I call it, the tea leaves, in terms of what was going on in the economy," he said. "I hope that in some small way I gave them some sense of what the economic environment was like so they could adjust their plans accordingly."
During his time at NAFCU, Wai created the CU Economics Group (CUEG), which provides economic data and reports on a variety of emerging topics, and led preparations for the NAFCU board's annual visits to the Federal Reserve. He also is responsible for the creation of NAFCU's research publications-including the quarterly Cost of Funds Report and the monthly Economic and CU Issues Monitor-and its economic forecasts. He was promoted to VP in 2011.
But of all those credits, what Wai is most proud of is the downloadable Net Worth Calculator he introduced approximately three years ago that is available today on NAFCU's website.
"I thought that was groundbreaking," he said. "My calculator puts parameters on how an institution should view its capital relative to its growth rate and earnings. Before that tool there was just a lot of talk and debate about what is the correct amount of capital a particular credit union should have."
Arguments With The ABA
During his 25 years in the CU industry, Wai developed a keen understanding of the makeup of credit unions, both in how they have the ability to adapt to economic changes over time and possess basic fundamentals that provide advantages over banks.
"I have been here a very long time, long enough to see many cycles in the economy and credit unions' resiliency. I have had constant arguments with my counterparts at the ABA who kept saying that credit unions don't understand what is going on and that they are not capable. In what has transpired over the 25 years I have witnessed, credit unions are very capable."
Besides having more stable core deposits than banks, which can sustain lending when times get difficult, Wai said what has buoyed CUs is leveraging technology to improve efficiencies and reach, and becoming much more sophisticated in pricing.
"Credit unions have changed over the years. I remember when a CEO came to me and said, 'A loan is a loan,' and that all members get the same price. Now a lot of institutions do risk-based pricing. This has helped credit unions better manage risk and extend lending to more members."
As Wai prepares to move into retirement and travel extensively with his wife, Jill, he looked back on his career as NAFCU's chief economist, is proud of the accuracy of his forecasts overall, and said, "it was an honor to serve for all those years. There is a bright future for credit unions and I see them not only as survivors, they will thrive."
NAFCU has yet to name a replacement for Wai.
