Unprecedented Times - What's the Credit Union Role?

The historical parallels describing current economic events continue to reach further back in our history. The country and credit unions continue to cope with unique circumstances. What should our response be: change course, wait and see or look for opportunities?


The historical parallels describing current economic events continue to reach further back in our history.
In just the past week the papers have reported:

  • The lowest level of short-term interest rates since 1961;
  • The largest, quickest fall of the Conference Board's consumer confidence index;
  • The fastest turn ever of unequaled federal budget surpluses into deficits;
  • The 75.5% use of industrial capacity in September, the lowest since 1981;
  • A one month decline in October wholesale prices at a rate unseen since 1947.

The country and credit unions continue to cope with unique circumstances. What should our response be: change course, wait and see or look for opportunities?

Weaknesses Exposed: The Postal Service Dilemma

For some the events precipitated by the September 11 bombing will require drastic actions. Because of the anthrax letters in the US Postal system and the resulting disruption of service, the Post Office is estimating its third consecutive year of losses and is asking for another price increase, this time in first class mailings of 3 cents on the current 34-cent rate.

Postal volume and revenue is down 6-10% in the two months since the attack and annual losses are now projected in the billions of dollars. The Service has purchased 4.8 million masks and 88 million gloves for mail handlers - just one of the new security outlays.

The Postmaster has asked Congress for a $5 billion bailout in part to cover a $2 billion revenue loss. Without Congressional funding, one lobbyist projected that the Postal Service could enter a "death spiral" with higher rates leading to lower volumes requiring either a continuing federal subsidy or loss of universal service.

For some industries the times will exacerbate already difficult business situations. To survive these, firms will have to take drastic measures, because in many cases they faced severe competitive challenges even before the new economic events. The terrorists' disruptions have accelerated the need to find some other business solution fast, get government assistance or go out of business.

Are Credit Unions Exempt from the new Realities?

With fourth quarter data already partially reported, all the industry signs are positive. Earnings are near 1%, liquidity continues to pour in, and auto loans plus refinancing for real estate continue to keep the lending shops busy.

Without the economic pressure facing other industries, should credit unions just wait the situation out? I believe the answer is no, for three reasons.

  1. There are some members who need unprecedented help. One New York credit union is helping some of it borrowers who are facing hard times with special loan workouts. The credit union for a period of time is applying all payments to principal and not accruing additional interest. The manager explains these are people who have been good members and got caught by circumstances.

    A second credit union is going through its real estate portfolio and calling members who can benefit by refinancing their current loans at a lower rate with the credit union.

    Both actions are a targeted form of interest rebate designed to help members who can benefit the most.

  2. The second reason is that the level of current interest environment is without precedent since deregulation. While some market rates were this low in 1961 and before, savings and borrowing rates for credit unions and banks were set by law not by market forces. With short-term investment opportunities at 2-2.5%, even money brought in at 0% interest, is hard to redeploy at a positive spread. ALM ceases to function normally when a 0% floor is reached on cost of funds and yields continue to fall. Spreads can only be squeezed further.

    Some credit unions were still paying 4% and even 5% on regular share accounts at the end of the third quarter. Other credit unions are paying rates lower than at any other time in the credit union's history on regular savings.
    Since ALM decisions now have limits on their effectiveness to protect earnings, other actions will be necessary to preserve earnings.

  3. The extraordinary disruptions in delivery through traditional branch and mail channels will require an acceleration of virtually all Internet, that is, digital substitutes. For virtually every service provided by mail, there is an Internet equivalent. But it is not enough to just offer the option, now is the time to train members to use these options. Members can help prevent disruptions to credit union service by changing their channel habits-this is a way each member can play a small, but important role in the current fight against terrorist disruptions.

Similarly, as branch and head office locations on sponsor premises are put off-limits for security and other reasons, the Internet provides alternative communication and transaction capabilities that are substitutes for almost all branch services.

The Business Model Imperative

The fall of interest rates has made the net interest margin business model for credit unions less effective. Rates on saving cannot go lower than 0% and yet short term yields on loans and investments may continue to fall along with 91.5 - 1.75% Federal Funds target. No one knows how long rates may stay low.

As the net margin is squeezed, the only other source of revenue is fees from existing and new services. How important is this revenue? As shown on the graph below, non-interest revenue is now almost 1/3 of the net interest margin, an increase of 5 percentage points in just the last six months.




Jan. 21, 2002



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