The doomsayers are already at work. Commentators use the March 31 data to prove their theory that an economic Armageddon is just around the corner. The end of everything we value. Unless of course we adopt their solution: more government, reopen faster, etc.
This pandemic is a health and an economic crisis. However, the greatest danger may be a loss of confidence in the spirit of who we are. Anyone who understands what made America today and why credit unions were created, knows that we will persevere and sustain.
Avoiding Self-Fulling Prophecy
But we must be careful not to project ourselves into a self-fulfilling prophecy of demise. That occurs when short term numbers or the peak of a problem is assumed in models and presented as the “new normal.”
Persons with an agenda will use these scenarios to enhance their position, resources or reputations. This happened in the 2008-2009 crisis and we need to learn that lesson in this new one.
These kinds of forecasts are impossible to make with accuracy. For they ignore the capacity of leaders and organizations to change and create “new normals;” that is, their innovative capacity to change the core assumptions models employ.
The First Quarter Numbers: A Case in Point
The first quarter numbers for most credit unions will show declines in the traditional measures of financial performance. ROAs will fall or even be negative, loan loss reserves will go up. Growth may slow. Delinquencies will increase, but certainly not by as much as will be the case for the June 30 numbers.
So what do the numbers mean? The most important point is that credit unions are sharing the financial pain and uncertainty of their member owners. This is the basic fact that is creating these numbers.
Credit unions are stopping fees, lowering rates, offering skips pays, and many other efforts to help members transition the unanticipated immediate economic shutdown required to stop the COVID virus.
Unemployment will reach heights not seen since the Great Depression. On average over 16% of the labor force (over 30 million) lost work in just one month. Rent, auto and credit card payments will be slowed or missed.
The members don’t know what their future will be; neither does their credit union. The credit union goal is not to hit an ROA goal, but rather sustain member relationships.
A Transition in Thinking and in Financial Trends
Traditional financial performance can be a very imperfect measure for how credit unions are serving members. At this time the numbers that may be the most unusual could be those that show everything is OK using traditional measures. More relevant performance analysis should focus on how many members are being helped and in what ways. For the ultimate strength of any credit union is its members.
Today, leading credit unions are reimagining how their resources can be used for members whose financial circumstances changed outside their control. This requires patience, creativity and new ways to structure member relationships.
This crisis is more than pivoting to virtual distribution, remote delivery and zoom interviews; the most critical innovation may be in the way credit is conceived. Loan terms may be extended, rates reduced, or payments based on whatever income is available. Outstanding credit may be restructured into A and B payment “tranches” in which the subordinate B tranche is the write-down needed to keep the member in the home or auto. It is the tranche that could be forgiven if the member cannot find work at previous income levels.
Monitor, Not Forecasting
Periodic reporting of the facts is important to ensure the industry’s collective resources are sent to the areas of highest need. Some credit unions will be more threatened than others because of the circumstances of their member base or community. The NCUSIF was constructed so that capital could be used to help these firms recover.
The greatest danger is not from the crisis itself, but how we respond. In both credit unions and government, competence, expertise and leadership ability is crucial. There is no prior road map to a new normal. Those in positions of authority must act with intelligence, recognizing lessons from the past. Credit unions have never lacked resources in a crisis, What is more important is wise stewardship of these mutual resources.