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
- 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
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.
- 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
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.
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
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
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