In risk analysis, it is important to make realistic assumptions about potential bad scenarios that could play out—large increases in interest rates and credit risk exceeding expectations are just a couple that come to mind.

While interest rates are at an all-time low, credit risk is at an all-time high for some credit unions. In preparing for your future, don’t mistake an all-time high with worst case.

For example: back in August 2007, the Associated Press reported that foreclosure filings had soared 93% from July 2006 to July 2007 and that the national foreclosure rate stood at 1 filing for every 693 households. Then in the first quarter 2008, CNN reported that, according to the Mortgage Bankers Association, the number of homes in foreclosure had topped 1 million.

Given this unprecedented level of foreclosure activity, it certainly felt like it couldn’t get any worse. However, according to RealtyTrac’s 2009 year-end report on foreclosures, there were over 2.8 million homes, or 1 in 45 households, with foreclosure filings in 2009 alone.

The bottom line is that, in risk planning, it can be very dangerous to assume that just because things are bad they can’t get any worse. It is important for your management team and board to understand the potential impact on your operations if things do get worse. It is likewise important for you to have well thought out plans—today—as to how you will pull your strategic levers to manage your credit union through even rougher times.

Hope for the best, but plan for the worst… or at least minimally prepare for the worst.

Imagine a scenario where it is difficult to find deposits. Suppose the stock market is booming and members are taking funds out of your credit union. Even if you don’t have liquidity issues, what if your competitors do and deposit rates are higher as a result?

Is this hard to imagine given all the liquidity you have now? Consider the relationship between the change in the Dow Jones Industrial Average and credit union deposit growth. In the past, strong stock markets have typically been accompanied by reduced deposit growth. This pattern has yet to repeat in 2010, but what if it does? What would your liquidity position be if you lost the funds you have gained in the last year?

Also consider that this time your external sources of liquidity may not be available. What if a new corporate credit union structure included a reduced ability for corporates to lend funds? How about the FHLB? What if they are not able to lend funds at the level they have in the past?

The recently finalized Interagency Policy Statement on Funding and Liquidity Risk Management underscores this importance of liquidity planning. This policy statement specifically requires financial institutions have contingency funding plans (CFPs). We recommend you prepare for potential future periods of reduced liquidity now rather than wait for your regulator to request a CFP, or worse yet, to face a period of tight liquidity without a plan.

Building on our last post on U.S. household debt being reduced primarily by default, and with consumer credit drying up, more and more struggling consumers are turning to bankruptcy as the only solution to solve their debt burden.  There were 158,141 U.S. bankruptcy petitions filed last month, a 35% increase over February’s figure.  Moreover, filings in a dozen states increased by double-digit percentages in the first quarter of 2010 compared to 2009 monthly averages (Personal Bankruptcies Hit a High and May Keep Rising, Time.com, April 5, 2010).

With a steady unemployment rate, and even an increasing “underemployment” rate ticking up to 16.9% according to the BEA, how long will the bankruptcy trend last?

Perhaps even more interesting is the vast increase in the debt burden causing the wave of bankruptcies.  According to the Federal Reserve, personal borrowing in the U.S. is ten times greater than in 1960 if you adjust for inflation.

During your strategic planning process, it may be worthwhile to consider the monumental increase in U.S. consumers’ debt burden over time.  What could happen if consumers become more and more debt averse?  Will the challenges facing adult consumers today socialize younger generations for a thriftier lifestyle?

Consumer confidence, jobless rate, existing home sales, manufacturing, CPI, PPI… just about every day a body of experts or analysts releases a statistic that indicates the state and health of the economy.  These statistics, numbers and finding are no doubt a helpful indicator for where the economy stands and the direction it might take.  However, just as a picture is worth a thousand words, statistics tell more than one story.  Consider the following example:

According to a report released by the Federal Reserve on March 11th, “Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion…the first annual drop since records began in 1945” (Americans Pare Debt, The Wall Street Journal, 3/12/10).  At first glance, it would appear that consumers are paying down their debts, especially when considering that consumer spending was (.6%) and the personal savings rate was 4.3% in 2009 (BEA.com).  Sounds like a good story at face value.

Well, the second story is not so positive.  The majority of debt being shed by consumers is occurring through defaults on mortgages and other obligations—evidenced by the estimated $200B in mortgage debt written off by banks and investors in 2009 (Americans Pare Debt, The Wall Street Journal, 3/12/10).

When considering any statistic, understand the real story behind the numbers and ask yourself:

• What is this telling me?
• What is this not telling me?
• Why might the number have changed?