MADISON, Wis.—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 also 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.
The economic snapshot, along with a clear picture of how U.S. credit unions fare in relation to their for-profit counterparts, was presented by Steve Rick, senior economist for CUNA & Affiliates, during a webinar sponsored by World Council of Credit Unions (WOCCU) for its G7 members. The group, which consists of member organizations in Australia, Brazil, Canada, the Caribbean, Ireland, Poland and the United States, represents 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's president & CEO who hosted 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. Since the credit union industry has not invested heavily in subprime loans, there are few liquidity issues for most institutions, according to Rick. In fact, credit unions' liquidity base, largely made up of member deposits, is growing thanks to skittish investors, who are withdrawing money from the stock market and putting it into share savings accounts.
In addition, the lack of a liquidity crisis and an average institutional net worth of 11.4%, compared to 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, resulting in a need for lower provisions for loan loss than many banks now must have. The lower provisions free 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."
World Council of Credit Unions is the global trade association and development agency for credit unions. World Council promotes the sustainable development of credit unions and other financial cooperatives around the world to empower people through access to high quality and affordable financial services. World Council advocates on behalf of the global credit union system before international organizations and works with national governments to improve legislation and regulation. Its technical assistance programs introduce new tools and technologies to strengthen credit unions' financial performance and increase their outreach.
World Council has implemented more than 290 technical assistance programs in 71 countries. Worldwide, 57,000 credit unions in 103 countries serve 208 million people. Learn more about World Council's impact around the world at www.woccu.org.