Typically, the industry sees savings growth occur during the first half of the year, but the magnitude of this year's cash influx is much more significant. Total share deposits rose by $44 billion for the whole industry in the first quarter of 2009 alone. While seasonality has continued to play a role, so has the unsteady economy, as people tend to save more in troubled times. Also, tighter restrictions on credit and home borrowing are driving personal savings. Data from the U.S. Bureau of Economic Analysis confirms what many credit unions have experienced firsthand: household savings has significantly increased since strains on the economy surfaced in the second quarter of 2008. Case in point: In April 2008, the personal savings rate was zero. By May of this year, it had risen to 6.9 percent, the highest since December 1993.
Today offers a historic opportunity for credit unions that have the strength and determination to grow. In a system flooded with cash and a banking industry tarnished by news of big failures and government bailouts, credit unions are positioned better than ever to prove their value and uniqueness to the communities they serve.
However, managing this influx of cash is not without risk. A larger deposit base influences both the risk profile and the earnings side of credit unions' balance sheets, creating two conflicting missions: covering the funding costs on the liability side of the balance sheet and containing the duration risk on the asset side. And from a regulatory standpoint, a larger asset size means a lower capital ratio. This can pose problems particularly to credit unions whose capital is already hurt by the recent charge-offs related to corporate credit unions.
So, what should your credit union do with its influx of cash? A good, general principle is to manage your balance sheet conservatively and prepare for worst-case scenarios. Start with the following considerations:
How well is your credit union capitalized?
What is your existing funding structure and asset allocation?
Are your credit union's earnings especially strong, barely break-even or deep under water?
How is the economic condition and competition in your local market?
What alternative funding sources are available if any new deposits leave in the near future?
Once you have a clear picture of your individual situation, you'll be better prepared in the decisions you make.
To manage the situation successfully, you need a full balance-sheet strategy. While much can be done about where and how to place the new money on the asset side, the funding side is actually a good starting point for the thinking process. Are your dividend rates too high? Is it necessary for your credit union to stay on top of the local competition in all deposit categories and terms? Also, determine which deposit product(s) will be most valuable to your members and most helpful in nurturing future relationships. And with the yield curve so steep, ask if your credit union's CD offerings should reflect it. An effective funding strategy on deposits is probably more important than ever in the current economic environment.
On the asset side, consider your own risk capacity and current risk/earnings position in designing investment strategies for the cash inflow. This should be similar to a leverage analysis. With an unlimited combination of possible asset allocations, there is, unfortunately, no silver bullet for everyone. Your credit union may want to consider options such as different bullet ladder structures (where matured balances are rolled over to the end of the ladder as the deposits roll over), structured investment securities (offering better yield and spread with the same duration exposure), non-agency security investments, and prudent consumer lending as allowed by your credit union's capital support. Credit risk could potentially offer a great return, but it should be carefully evaluated before your credit union moves on it. And remember, it is a good idea to be prepared for the worst, even if nobody thinks it will happen. After all, many "un-thinkable" things have occurred in the past year and a half.
Today's influx of cash presents a tremendous opportunity for credit unions. But it also requires careful planning and an integrated marketing strategy, on both the liability and the asset sides of the balance sheet. The key is forward planning and running the analyses based on various assumptions and scenarios. For many credit unions, it's the moment to "Think boldly. Move carefully."
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