There is no question the effects of the subprime meltdown have caused a ripple effect through the world’s financial markets. We have seen an increase in credit spreads, previously liquid markets becoming illiquid, and extreme volatility in the equity markets. The impact of this to credit unions could be positive.
1. Credit Unions could see an increase in net interest margin
One challenge many credit unions have experienced over the past two years is margin compression. The flat yield curve has meant credit unions have not been able to net as much interest income. One bright light from the recent financial instability is the yield curve has a little slope in it, at least more than we have seen for quite some time. Going back to August 28, 2006 the spread between the two year and ten year treasuries was negative 8 basis points. This means this part of the yield curve was inverted. As of August 28, 2007 the spread between the two year and ten year treasuries is 43 basis points. This isn’t quite back to the historical normal spread of 73 basis points, but this should help credit unions in the short term with net interest income.
2. Credit Unions could expect large share inflow
Due to the volatile equity markets, credit union members could be afraid of investing in equities and turn to the safety of insured deposits in financial institutions instead. This is the classic flight to quality. The more volatile the markets, the better chance credit unions will have of attracting shares. Also, consumers are generally in a savings mode in the 3rd and 4th quarters as they gear up for the holiday season. Given the already high consumer debt ratio, it is unlikely consumers will be looking for more debt.
Some competitors may also not be in a financial position to offer as competitive rates going forward. Their efforts to emerge safely from the subprime mortgage crisis could mean that they will loose focus on retail deposits. The end result of this could be an inflow of shares for credit unions.
3. Credit Unions have excess liquidity
One of the real challenges facing many of the players in the subprime markets has been access to liquidity. The real benefit of excess liquidity is the ability to continue to fund loans while others are forced to stop funding. Credit unions have over $121B in investments maturing in less than 1 year which can act as a primary source of liquidity. Additionally, most credit unions have lines of credit set-up with the Federal Home Loan Banks as well as corporate credit unions. Credit unions also have access to the secondary markets from places such as Charlie Mac. For many credit unions, liquidity planning has generally been part of “rainy day” scenario planning. It doesn’t appear yet that liquidity will be an issue for credit unions.