Posts

/by

Testing a Negative Rate Scenario? Consider These Questions First

,

There has been a lot of buzz recently about the potential for negative interest rates to hit U.S. financial markets at some point.  Short-term rates have been negative in Europe since June 2014, and the Bank of Japan made the move in January of this year.

European Central Bank rates fall below zero in 2014

Before you test this scenario from an asset/liability management perspective, there are several strategic questions that should be evaluated.  Consider the following:

  • How would loan rates change? Would your credit union’s floor rates on certain loan categories stay the same – meaning even if market rates drop, the loan rates will not decrease further, as the credit union would want to be compensated for liquidity, credit risk, or other concerns?
  • How might loan demand be impacted? This question could be difficult to answer because loan demand is often multifaceted, driven by factors other than just the current level of rates, such as the overall strength of the economy or the direction in which housing values are moving.
  • Could deposit rates drop further, or is there a scenario where the credit union would charge members a fee to hold deposits? If so, how might your members respond? If a “negative rate” comes in the form of fees, and if members have deposits at 3 or 4 different institutions, would they pay fees at multiple institutions or consolidate their balances to minimize the fee impact?  How could this impact liquidity and liquidity planning?
  • If members are charged for their deposit balances, would they be more likely to use those funds to pay down loan balances, resulting in a drop in loan-to-assets?
  • Would important sources of non-interest income be impacted, such as NSF, ODP, or interchange income?
  • What are some changes your biggest competitors might make? How would this impact your credit union’s response to negative rates?

There are many additional questions that could be considered.  The value in discussing these types of scenarios is not that every single question is asked and answered, but that key stakeholders are thinking strategically about events that could materially impact the future of their credit union.  Even if this specific scenario never plays out, thinking through how the credit union might respond and practicing the process can be worthwhile, and can then better inform any asset/liability management modeling you consider.

/by

When Will This Be Over?

, , , , ,

It’s natural to wonder when things will get back to “normal.”  But week after week, the only thing consistent in the economic indicators is that they are not consistent.  So how do we plan for the future?

Most credit unions are designed to thrive in a different type of economic environment─one we may not see again for a long time.  Yet opportunities exist in every environment.  The key is the ability to alter our mindset and look for ways to take advantage of the current reality.

Try test driving the scenario:  “It is 2015 and we are thriving.  The economy is about the same as it was in 2010.”  What did you do to thrive?  How is your strategy different than it was in 2010?  Instead of looking for a “magic bullet,” consider staying true to your core business and improve areas of expertise.  For example, there may not be much loan demand at the moment, but by truly understanding what your target market needs and values, you can work toward getting more of the loan demand that currently exists.

Also, many institutions are focused on cutting costs; according to NCUA’s aggregate FPR for March 2010, there was a 36% decline in the industry’s average operating expense ratio from March 2009 to March 2010.  However, keep in mind that some cuts are not sustainable, such as pay cuts and leaving critical positions vacant.  While they may be necessary in the short term, work toward sustainable cuts like improvements in processes and strategic changes in product offerings.  Consider the following statistics from the Harvard Business Review’s July-August 2009 readers’ survey, How Bleak is the Landscape?

  • Only 27% of businesses surveyed are streamlining product or service offerings
  • Only 34% are reengineering processes
  • Only 37% are improving current products, services or customer support

Rather than hunkering down and waiting for the storm to pass, meet the storm head-on.  Stay focused on strategy and never stop thinking about ways to improve your business.