October 27, 2008

Reviewing statistics for the past 18 years, the average unemployment rate is 5.4% with the high and low being 7.8% and 3.8% respectively.  Interestingly, from October of 1994 to the present there have only been eight months where the rate was above that assumed natural rate of 6.0%.  Six of those months were in the middle of 2003 with the remaining two months being August and September of 2008.  What occurred in our economy that has allowed the unemployment rate to be below 6.0% consistently for so long?  It’s not that we didn’t have people that needed to be retrained or were transitioning from job to job.  The unemployment rate was low because we have (or perhaps had) a global hyper stimulated economy that uses leverage (debt) at all levels.  Consumers use debt to purchase goods they cannot currently afford.  Corporations use debt to expand production.  Corporate and consumer debt is financed by financial markets that have been created by financial companies that use debt to expand their balance sheets and generate exponential income.  Essentially we have been able to utilize debt to purchase items before we could actually afford them.  This activity has had the effect of cramming what would have been future activity into current periods creating artificially high economic expansion.

What does all this mean to a credit union?  When making plans for 2009 and beyond, credit union managers should think about what additional unemployment will mean for their membership.  Then think about what the credit union can do to help those members.  Some of the obvious things credit unions can do are pay the highest possible rate on shares and charge the lowest possible rate on loans.  This has to be done intelligently because the credit union is a cooperative, not a charity.  Analyze the current state of the balance sheet and try to determine the minimum Return on Assets (ROA) level the credit union can run on and still maintain capital.  This helps establish a floor for rate setting decisions and allows management to run scenarios with various growth rate assumptions.  The membership will look to the credit union for help, but establishing additional credit card lines will start digging them into a hole that could be difficult to recover from.  Consider using the sleepy old signature loan to provide financial help to members.  Signature loans have a defined maturity date and payment, so members have money to tide them over but a schedule for paying off that debt.  This is just one of many options the credit union can offer members, but always remember that credit unions need to model and constantly manage the balance sheet so the credit union is able to serve members both now and in the future.