CUs poised to prosper during downturn, says CUNA

MADISON, Wis. (10/2/08)--Conservative lending practices, favorable rates and a liquidity base primarily comprised of member deposits have well positioned U.S. credit unions to weather what economists are now calling a pending recession.

Tumbling stock prices have prompted investors to put more of their money into credit union share savings accounts, further strengthening institutional liquidity and better enabling credit unions to help members through the current financial crisis, said Steve Rick, senior economist for the Credit Union National Association (CUNA), during a webinar sponsored by World Council of Credit Unions (WOCCU).

He presented the economic snapshot and told how U.S. credit unions fare against their for-profit counterparts to WOCCU's G7 group, which consists of member organizations in Australia, Brazil, Canada, the Caribbean, Ireland, Poland and the U.S.--representing the world's largest credit union movements.

The Wednesday webinar was presented in response to frequent requests WOCCU has received for information about the U.S. economy and its impact on credit unions from members in other countries, according to Pete Crear, WOCCU president/CEO and host of the webcast.

"The U.S. economy has a global reach, and problems we may be having here definitely impact the financial well-being of our members in other countries," Crear said. "We wanted to share the best information we could from one of the credit union industry's top economic resources."

Rick's 90-minute presentation painted a dour picture of the next several years, during which he said the economy will likely enter a recession.

Declining home values continue to plague consumers, more of whom are defaulting on loans that now exceed the value of their homes. Investors have been steering away from mortgage loan portfolios that continue to decline in value, particularly subprime loan portfolios. Large banks that have invested heavily in these portfolios now find themselves with a liquidity crisis, realizing large losses and responding by tightening credit requirements to preserve liquidity, further dampening economic growth by restricting consumer spending.

Credit unions, on the other hand, are in good position, thanks to their traditionally conservative approach to lending, Rick said. Since the credit union industry has not invested heavily in subprime loans, there are few liquidity issues for most institutions, he added.

Credit unions' liquidity base, largely made up of member deposits, is growing, thanks to skittish investors' withdrawals from the stock market and deposits into share savings accounts.

Also, the lack of a liquidity crisis and an average institutional net worth of 11.4%, compared with banks' average 7.8%, have helped credit unions remain more flexible in their loan rates and standards, Rick explained.

These factors are particularly critical to mortgage loans, which have been increasing in number for many credit unions whose strong institutional liquidity allows them to offer more flexible rates and terms. Credit unions have limited credit risk because they did not engage in subprime lending. The lower provisions for loan loss frees up more capital, allowing credit unions to lend with fewer restrictions and stimulate consumer spending, he added.

"Credit unions should remain very optimistic during the current financial situation," said Rick. "There is inherent strength in credit unions' cooperative model to deal with the housing and credit crisis."

courtesy of cuna.org