The trio said gloomier economic conditions do not necessarily translate into tighter credit standards, higher rates and fees, lower dividends, cutting back services or laying off employees just to keep net income from falling for a year or two.
That's because most credit unions now "have very strong balance sheets and near-record high capital levels," states the report, prepared by CUNA Chief Economist Bill Hampel with senior economists Mike Schenk and Steve Rick.
In the face of the developing recession "the appropriate course of action for most credit unions is therefore to let the capital cushion do its work: temporarily let net income fall as a result of the loan losses."
The CUNA report, "The U.S. Mortgage Crisis/Causes, Effects and Outlook Including Suggested Credit Union Responses," points out that a recession's impact on credit unions means:
- Faster saving and asset growth;
- Significant increases in loan delinquencies and losses;
- Substantial downward pressure on net income; and
- Falling net worth ratios.
These factors will certainly snatch the attention of boards and senior management, notes the report.
"But, in this case, we urge caution in your response," the economists write. They note that the downturn is neither the fault of credit unions, individually or as a group, and not likely to be very long term.
"In many cases, the appropriate actions needed to deal with these challenges will be modest," the report states.
Importantly, however, the report warns against credit unions taking actions that are too strong in response to the recession's impact.
"It is imperative to avoid doing unnecessary harm to the credit union that would result from trying to maintain net income in the current environment," the report states. "The best response to a decline in net income caused by rising loan losses may be to adjust your budget and then carefully let it happen."
The report advises that credit unions "keep an even keel and let capital absorb much of the short-term dislocation," thus giving credit unions the opportunity to show their members and the public "the unique and substantial benefits of the cooperative structure."
"There will be a rise in disgruntled bank customers in the coming year. This may help overcome their inertia in considering another financial institution," the report states.
In analyzing the current economic situation, the report points out that credit unions are largely "collateral damage" of a subprime mortgage debacle, which largely did not originate with credit unions.
"This has had two effects on credit unions: First, some members with toxic mortgage loans from other lenders are finding it difficult to pay their credit union loans. Second, the broader economic slowdown that is spreading from the subprime mortgage mess is causing other members to have economic difficulty, and therefore fall behind on their loans."
The report estimates that the duration of the problem affecting credit unions should be about three years: One year of a recession, followed by a two-year recovery to reach the economic level of activity that occurred before the recession set in. "Of course, in some regions of the country the recession will be more severe, and in others less so."
More specifically, under that scenario, the report suggests that credit unions may expect:
- Rising loan losses and falling net incomes in 2008;
- Flattening (but still high) loan losses and stable (but still low) net income in 2009; and
- Falling loan losses and improving net income in 2010.
coutesy of cuna.org