What Can Credit Unions Do to Insulate Themselves Against Recession? 

installing insulation
By Blake Hastings

4 minutes

Four strategies to implement

Sponsored by CUES Supplier member SWBC

Rumblings of the U.S. economy falling into recession have been growing for months, but recent higher inflation data and monetary policy action have rapidly increased the likelihood of a recession occurring late this year or early next to around 90%.

The only questions left are when it will begin, how long it will last, how serious the hit will be, and what your credit union can do to ride the turning economic tide.

Over the next 12 to 18 months, credit unions will need to pull out their recession management playbooks. As we do not see the forthcoming economic downturn being so severe as the Great Recession or the pandemic-related period, credit unions will not need to game plan for the worst-case scenario.

1. Prioritize Risk Management

This will continue to be a year in which risk management will be at a premium. Credit unions that perform well at this will come out the other side in stronger positions than those that don’t. 

The first thing credit unions should consider doing is stress testing their assets for a 5% economic downturn. Even though we expect the economy will contract less than that, there could be regional differences. 

Secondly, if they have not already done so, credit unions should consider increasing loan loss reserves.  Large institutions like JPM Chase have already announced they are doing so in preparation for some deterioration in loan performance. 

Additionally, credit unions should keep a close eye on their balance sheet interest rate risk. As short rates eclipse longer rates and this condition persists for a longer period, the interest rate mismatch will start becoming a real challenge. 

Those who can should hedge their interest rate risk. Those who cannot or choose not to should be careful “buying” deposits at higher rates over the next 12 to 18 months. 

Good collections operations, insurance monitoring and communication with borrowers will be at premium. Even though we don’t expect the level of layoffs seen during many recessions, consumers’ incomes are being negatively impacted and will continue to be for the rest of this year and well into the next. 

Credit unions should continue to be disciplined with underwriting standards and even tighten them if necessary.

Loan-to-value ratios on used cars are a perfect example of a potential for loss for credit unions. As used car prices continue their inexorable decline, LTVs of 140% to 150% will become higher risk as credit quality deteriorates. Home values should hold up fairly well in most markets due to such limited supply and, thus, pose less LTV risk to credit unions.

While we do not see any systemic issues emerging like we saw in 2008-2009, individual institutions could see distress if they are not using good risk management practices.

2. Emphasize Other Areas of Lending

As happens in recessions, some areas of lending are seeing an uptick. As consumers struggle to keep up with inflation, they are turning to revolving consumer loans (credit cards) and home equity loans to maintain their standards of living. Homeowners have added almost $3 trillion in equity over the past year as home prices have skyrocketed across the country, representing a large potential source of capital. 

As a result, both of these are areas into which credit unions should look for expanding lending activity (with appropriate underwriting). This may be somewhat of a temporary phenomenon and is likely to return to a more normal level once inflation abates.

3. Look for Way to Generate Non-Interest Income

As margins continue to be squeezed and loan demand softens, credit unions will need to look toward non-interest income to offset revenue losses from lending. Point-of-sale transactions may not be as fruitful as in the past with loan demand likely to continue softening and non-sufficient funds fees continuing to be scrutinized by regulators. Creativity in this space will undoubtedly be rewarded.

Offering products that bring real value to your members’ lives during tough economic times, such as guaranteed asset protectionmajor mechanical protection and SWBC’s newly introduced healthCAR program, could help generate non-interest income.

4. Drive Efficiency and Productivity

Like almost every business playbook for recessions, credit unions need to look for ways to drive efficiencies (cost-savings) and productivity (doing more with less). Utilizing technology and process improvements to drive greater productivity are core priorities for businesses in times of economic slowdown. Partnering with vendors to help manage operational and labor costs are additional common steps to keep the expense side of the ledger well-maintained. 

Blake Hastings joined CUES Supplier member SWBC as SVP/corporate strategy and chief economist in July 2021. In this role, he provides leadership in the areas of corporate development and long-term growth strategies. Prior to joining SWBC, Blake worked for the Federal Reserve Bank of Dallas for more than 14 years. He served as an SVP overseeing the San Antonio and El Paso branch offices.

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