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The lingering economic slowdown and the threat of hostilities at home and abroad has produced an endemic pessimism among many business leaders. Disturbed by international affairs, an increasing degree of discouragement has invaded the business world. That attitude is evident even among some credit union leaders. Caution becomes the watchword of the day, and risk outweighs opportunity in the business decisions of the timid. In fact, this atmosphere of low rates, reduced corporate profits, and world tension may produce significant opportunities for credit unions whose asset and liability strategies are aligned to the times. For more than a century, we’ve seen business cycles alternate between boom and bust, low rates and high rates, optimism and pessimism. If history tells us anything, it is that our current state of record low interest rates will change, and that in the relatively near future, rates are likely to rise once more. By many measurements, our economy is in relatively good shape. Housing starts are at a 15-year high. Added by aggressive incentives, auto sales have stayed strong. Overall retail sales continue to expand, although at a slower rate. Inflation last year dropped to its lowest level since the `60s. However, unemployment remains stuck at 6% and the stock market can’t seem to generate a significant thrust. In this environment, the Fed is not likely to move the Funds rate from 1.25%. It will wait until there is clear evidence that the economic recovery is firmly in place and the concern about deflation has been eliminated. The Fed is no doubt cognizant of the mistake the Japanese Center Bank made by prematurely raising rates and sending their economy back into recession. Learning from this mistake, the Fed is not likely to move rates again until later in 2003. But a chart of the Fed Funds rate over the past 15 years would reveal that significant lows in interest rates are consistently followed by upturns. In 1993, for example, the rate hovered around 3%. By early-1995, however, the rate had doubled to about 6%. In this economy, we perceive historic opportunities for both individuals and financial institutions to reposition their financial profile. On the member level, for example, perhaps as high as 90% of first mortgage holders have taken advantage of the low-rate environment to refinance. The increased monthly free cash flow and the cash out on refinancing have been significant drivers in the solid consumer-spending trend. Similar opportunities exist for financial institutions that recognize and take advantage of them. In addressing their asset management strategies, credit unions need to emphasize that member loans will generally yield more than investments. In the next several years loan demand should rise significantly and the rates on new loans will likely be much improved, as the need for zero per cent auto subsidies decline. Therefore, it is important that credit unions emphasize future liquidity in their plans. They need to be planning for periodic maturities and for liquidity options in securities so loan demand can be effectively funded. Now is also the time to arrange warehouse lines of credit and resale channels for “jumbos” and other types of loans that the credit union may not want to book permanently. In addition, on the asset side, the credit union should be seeking out instruments with an up side in interest rates. For example, many credit unions are offering home equity lines of credit at extremely low rates, pegging these instruments to an index so that when rates rise the yield will rise along with them. Corporate credit unions also offer a variety of investment instruments with repricing features. On the liability side, the moves are just the opposite. Credit unions ought to be locking up the lowest cost of funds that we may ever see. Now is the time to extend CD maturities. Competitively, the banks have dropped CD and savings rates, dramatically reflecting the collapse of short-term rates. This represents a great opportunity for credit unions to be the leader on savings yields. Members are very rate conscious and attractive savings rates can draw deposits. Eventually, these shares can fund loans and higher yielding investments. This strategy can also build member loyalty. Members need all the return they can get in this slow economic period. Another opportunity to secure low cost funds is to look at credit unions’ borrowing options. Our corporate has over $100 million lent to members at this time. Loans from corporates have never been a better deal. Some of our members are using loans to fund their permanent loan portfolios. Other members use loans from the corporate to warehouse loans held for resale under delayed funding programs. Many credit unions have a very strong capital position, which allows greater leverage of their balance sheet. Corporate credit unions can assist in designing a strategy that will benefit both the credit union and its members. The corporate network was created and funded by the movement as a tool to provide credit unions with the resources they need to respond to business cycles in general, and fluctuating liquidity and interest rates in particular. Today, both members and credit unions have access to a vastly increased range of options in their efforts to manage assets and liabilities. Just as members take advantage of the broad scope of instruments now available to them, the corporate credit union system stands ready to provide credit unions with safety, liquidity and yields appropriate to prevailing conditions, in up economies or down.

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