SAN FRANCISCO-Will some of the additional risks taken during 2011 to get additional loan dollars come back to haunt in 2012?
William Haraf, commissioner for the California Department of Financial Institutions, told Credit Union Journal that "the concern I still have is that in this very low interest rate environment where demand for loans is declining-both from the household sector as well as in the business sector-banks and credit unions are scrambling to find revenue sources, and that's leading them in some instances to take more risks."
The commissioner pointed to CUs putting into portfolios fixed-rate, 30-year mortgages that expose them to potentially substantial interest rate risk. In the banking sector, meanwhile, Haraf has concerns about the more aggressive pricing that some lenders used to boost commercial loans.
During 2011 Haraf voiced his concerns about risky revenue-generating strategies at both the NASCUS Summit in September and the California and Nevada Credit Union Leagues' Annual Meeting and Convention in November.
He conceded, however, that the current limited amount of lending is providing some cover against future trouble. But, he said, "households are deleveraging in the aftermath of the crisis. Obviously prior to the crisis we saw a fairly dramatic build-up, not just in household mortgage debt, but in other forms of borrowing-credit card debt, auto loans and now a rapidly growing element of consumer debt is student loans. As the consumer has struggled to get their balance sheets in order, consumer loan demand is down, and that's contributing to pressure on margins, especially for credit unions, and also for those banks that do serve the consumer marketplace."
"As credit unions seek to generate a reasonable rate of return in this deleveraging environment they're in, they're scrambling to find revenue sources, and that may be exposing them to more risk in the process," he continued. "The amount of fixed-rate lending is one example; it's possible they would be looking to fund riskier borrowers as well."
The best solution for CUs, said Haraf, is for management and boards to be responsible about their level of risk-taking. But he added that the regulator/regulated relationship also plays a role.
Turning to the larger forecast for 2012, Haraf pointed out that while economic conditions appear to be improving, he continues to have concerns over the possibility of unanticipated rate spikes and the chance of a European financial meltdown and its affect on the U.S. economy and markets. He predicted moderate growth with elevated risk factors.
"As I think about our current situation, I'd say that quarter-to-quarter we're seeing improvements, yet I would characterize the environment as riskier than normal."
