October 22, 2008

Job Losses

By Bruce Six, Senior Vice President - ALM

As the economy falters and businesses need to find more efficient (read cheaper) ways to continue conducting business, the push to cut costs and create leaner operating units is leading to job cuts. This morning’s announcement from Merck and Company to cut 7,200 positions and yesterday’s comments from Merrill Lynch that over ten thousand jobs will be cut after Bank of America completes their takeover of the once powerful brokerage company are hard for members to hear. This is just more bad news to members who are already shell shocked from $4.00+ gas earlier in the year, the string of bank and financial company failures over the summer and the $700 billion bailout by the government.

We can expect to see announcements of even more job cuts over the next few weeks as companies announce earnings and outline their plans for the future. The typical response from members when massive job cuts are announced is to pull back and start hording dollars. Even when they work for stable companies and don’t view their job as being threatened, the thoughts about what they would do if they did lose their income usually turns members away from taking loans and back towards saving. There are some mitigating factors that may temper the response this time and the overall impact on credit union balance sheets. Hopefully the lack of lenders in the market willing to make mortgage, auto and credit card loans will keep credit union loan production a bit higher than would normally be expected with news of job cuts. On the liability side of the balance sheet the jobs reports will just add to the reasons members have for putting money in a savings account. Jobs added to the daily swings in the stock markets and the crushing negative returns on 401k statements should reinforce the desire for safety over rate of return.

What should you do if loans slow and member deposits increase? As always, you need to look at your balance sheet for the answer that is right for your credit union but, in general, you need to resist the urge to lower loan rates to try to increase demand. Remember the loan decisions you make today will live on your balance sheet for years to come so making a very low rate auto loan today may seem like a good decision but you might not like the impact on ROA when rates eventually start to rise. It can be helpful to review available investment rates before lowering a loan rate just to make sure you are not taking on risk with little increase in return. When looking to price shares and particularly setting longer certificate rates, the current low rate environment and expectations for rates to go lower provide an opportunity to encourage members to take longer CD’s at competitive rates now, that will be a future source of stable/cheaper funding when rates rise.