European Crisis Could Undercut CUs’ Net Worth, Loan Demand
Problems in Greece, Spain and other Euro zone countries could show up on credit union balance sheets, according to industry economists.
News from Europe has caused volatility in the stock market, said NAFCU President/CEO Fred Becker, which could spur a flight to safety by nervous investors who pull money from the stock market and place it in federally insured deposit accounts. Credit unions, already dealing with excess liquidity, could face even more pressure maintaining well-capitalized net worth ratios.
Becker outlined his concerns in a June 12 letter to NCUA Chairman Debbie Matz, in which he called on the regulatory leader to advise examiners to “discount and disregard a decrease in a credit union’s net worth that is solely due to an influx of liquidity as pertains to recent global economics events.”
Becker said he’s not trying to alarm anyone, he just wants the NCUA to be prepared in the event a flight to safety occurs.
CUNA Chief Economist Bill Hampel said he thinks the financial crisis in Europe will cause a flight to safety, and additionally, reduce U.S. exports to Europe. He forecasted European woes could shave 0.25% off GDP growth in 2012 and 2013. That might not sound like a lot, Hampel said, but considering GDP is only growing 2% to 3% a year, it is significant.
On a positive note, Hampel said the flight to safety could result in a mortgage refinance boom for credit unions, as investments in Treasury bills keep mortgage rates low.
“A significant portion of the population has significant equity and decent credit, so there’s a huge demand for refis now,” Hampel said. While credit unions could use the revenue that comes with refinancing and selling mortgages on the secondary market, interest rate risk could be an issue for those that typically hold mortgages on their books.
California Credit Union League Chief Economist Dwight Johnston said demographics will also intensify a European-fueled flight to safety.
“People in and near retirement can’t take any more hits,” Johnston said. “Earning next to nothing is better than losing principal.”
Additionally, Johnston predicted market turmoil over the next few months as big businesses sort out short-run and long-run strategies in Europe. Caution on the part of big business could also result in nonfarm payroll contraction and a slowdown in sales in August and September of this year, he said.
U.S.-based businesses with operations overseas will also see a decrease in their earnings as they convert them into U.S. dollars because the dollar is strong compared to other currencies.
Catalyst Corporate Federal Credit Union Chief Strategist Brian Turner agreed a flight to quality “implies a potential loss of principal” and added that investors “may not like the yield, but at least principal is protected.”
However, Turner said he thinks Europe will have less of an impact on the U.S. economy that his peers; instead unemployment will be a far greater influence on credit union balance sheets.
“If you’re not comfortable with your job, your home values continue to decline, and now you’re dealing with a volatile stock market, you won’t be enticed to go out and spend a lot of money, especially on big ticket items. And that is what credit unions are in the business of financing,” he said.
Despite the prediction that problems in Europe will maintain the current low-rate environment, Turner said credit unions should be so concerned about interest rate risk that they avoid making mortgage loans, even if they plan to keep them on their books.
“The real question in terms of earnings is what will happen to spreads, not so much what will happen to nominal rates,” he said.
The economy recovery in the U.S. is not being driven by rates, he said, which is something that has probably not before happened in the careers of most credit union executives.
Interest rate risk shouldn’t prevent credit unions from keeping low-rate loans on their books, because successful asset liability management doesn’t hinge on if cost of funds will increase, but how quickly.
“Risk managers are suggesting cost of funds will go up as quickly as asset yields, and that’s not supported by history, data or logic,” he said.
Bryan Clagett, chief marketing officer of online banking software company Geezeo, agreed Europe’s problems have an adverse effect on U.S. exports, and the volatile stock market will damage already fragile consumer confidence.
“Look at my own situation as an example,” he said. “I felt really good about my 401K a month ago, because it had returned back to pre-2008 levels, so I went out and spent some money, and made some improvements to the house. But then came the report that household net worth has declined 39% since 2008. That did nothing to drive my confidence, and made me wonder if I made a mistake spending that money.”