Is Your CU Ready to Take On Inflation?

April 13, 2022 at 11:51 am Leave a comment

It’s been a long time since we’ve seen inflation rising this fast.  So long in fact, that virtually an entire generation of credit union leadership has come and gone without ever having to deal with the impact that inflation can have on their institutions.  Here are some lessons from history that I gleamed from NCUA’s 1981 credit union report

I’m assuming for the purposes of this blog that the inflation that we are experiencing today can no longer be considered a transitory blip caused by temporary factors like supply chain stress.  While I will leave it up to the economists to explain the technical reasons for inflation, with China insisting on locking down its economy to fight COVID; the end of the war in Ukraine nowhere in sight and a red-hot labor market, the ingredients for inflation will be in place for months to come.  So, what can history teach us? 

  • Don’t be slow to react to interest rate sensitivity.  In the late 70s, money market funds became widely used as they offered consumers a way around Regulation Q, a depression era regulation which capped interest rates on checking accounts.  According to the report, large credit unions were slow to react to this increased competition with the result that in the late 70s, credit unions experienced “severe” outflows of member savings and a liquidity crunch. 

Today, members have even more opportunities to seek out higher returns.  The money market industry is now fully mature and a much higher percentage of Americans invest in the stock market than they did in the early 80s.  In fact, there are even predictions that the FDIC might see a drop in funds for the first time since WWII.  Presumably the same trends will impact credit unions.

  • Get ready to offer more share certificates. Federal credit unions paid more than $300M in dividends to their shareholders in 1981 which was a 25% increase in the amount paid in 1980.  The increase was fueled by share certificates on which credit unions paid $1.3B in interest dividends in 1981 compared to $711M in interest dividends paid in 1980.
  • Are your members going to be more or less loyal to their credit union than they were in 1981?  In 1981, 88% of all members were in occupational credit unions and another 6.6% were in associational common bond institutions.  Today, community and multiple common bond credit unions are the engines of the industry.  Will members be more likely to leave these institutions than their parents were to stop using their employer CU, particularly given the increasing use of technology?  If the answer is yes, then will we see profit margins shrink for these institutions? 
  •  Expect even more mergers. The early 80s also witnessed increased merger activity which posed new challenges for the Share Insurance Fund which was then only 11 years old.  The fund suffered losses that resulted primarily from a “major increase of costs due to merger and liquidation expenses” which increased 33% between 1979 and 1981.

Only time will tell, but if history is any guide, there is a bumpy road ahead for the industry.

Entry filed under: Economy, Economy (?). Tags: , , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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