March Market Pulse: Your Questions Answered
March Market Pulse: Your Questions Answered
During the March 2023 Market Pulse webinar, “How Credit Unions Are Adapting to Economic Uncertainty,” panelists Rob Wescott, former Special Assistant to the President for Economic Policy and President of Keybridge, LLC; Tom O’Neill, Risk Advisor, Equifax; and Mike Schenk, Deputy Chief Advocacy Officer for Policy Analysis and Chief Economist, Credit Union National Association (CUNA), discussed how credit unions are successfully growing deposits and championing financial inclusion even amid today’s economic uncertainty. Did you ask a question during our webinar? If so, the answers are below.
With all the uncertainty you have mentioned, how do you balance protecting the membership vs. serving new members and communities while providing access to credit?
Mike Schenk: There is indeed a delicate balance - an exact mathematical relationship between growth, capital, and earnings. Serving new members (growing) tends to put pressure on capital ratios which (in turn) higher earnings would be needed to maintain those capital buffers. Decisions to reward members and grow fast today will impact future decisions and activities - making it harder (for example) to expand branches, invest in technology, etc. Each institution is different - pursuing different strategies in different markets with different goals - so there isn't a "right" answer to this question.
Are the Credit Unions in better shape than Banks because of the more conservative investments?
Mike Schenk: Credit unions are more conservatively operated than banks (due to their structure i.e., no stockholders/quarterly earnings calls) - Credit unions fail at lower rates than banks historically and (unlike banks) their federal insurance fund has never operated in the red. Regarding the situation today - there are a small number of banks that are in big trouble- mostly related to the combination of a) concentration risk (i.e.,very large long-term investment portfolios) and a large percentage of uninsured deposits.
Most banks and credit unions have more traditional operations with far less exposure to risk. However, even these more traditional, conservatively-operated shops have exposure to interest rate risk and may face liquidity pressures. The key is to monitor and control that risk exposure - which the overwhelming majority have done.
Are credit unions having a harder time lately to get consumers since the Fed has raised rates requiring credit unions to pay higher rates to get funds to lend?
Mike Schenk: Depends on what you mean by "harder time." On one hand membership growth has been very strong - increasing by 4.5% in 2022 - 9x higher than population growth in the year.1 Credit unions aren't focused on maximizing profits which means that in a rising rate environment they tend to lead the market up on deposit pricing and/or lag the market up on loan pricing. Consumers appreciate this and are more likely to join - both because of this favorable pricing and because of our people-helping-people philosophy.
With respect to credit utilization rates, does this factor in revolving debt that is paid off each month? Do credit cards with attractive cash back rewards skew these figures?
Tom O’Neill: Yes, credit utilization accounts for both transaction (paid off each month) and revolver (carry balance over to the next month) behavior by using an average balance on the account over the course of the statement period. Cash back rewards do tend to drive higher usage of bankcard lines but I'm not aware of how those types of rewards cards are weighted between transaction and revolver behavior. Overall, however, we have seen a shift towards revolver status over recent periods as many cardholders who previously paid off their balances each month are now starting to carry over.
Why have card limits increased so dramatically?
Tom O’Neill: The card limit figure provided is an aggregation of all active high credit limits. The growth in that total reflects credit line increases that have been granted to active trades as well as the limits of all the new bank cards that have originated, the latter of which is the bigger factor. So, the lull in card limits that we saw in 2020 was due to new originations falling in that period and not keeping up with account closures and, in some cases, line decreases. The growth in card limits during 2021 and 2022, however, have mostly been driven by the strong growth in new card originations during that period.
Can you comment on any inflationary aspects associated with the Federal fiscal situation, i.e. bigger deficits and higher rates being paid on U.S. Treasuries? Is that not a challenge to continued Federal tightening?
Robert Wescott: Larger budget deficits generally mean more money in peoples’ pockets—either more government payments to people (like rebates or stimulus checks or tax credits, etc.) or lower tax bills. Either way, it means more spending power for households and that means more demand for goods and services. And that typically means higher inflation. So yes, larger Federal deficits would make inflation higher and that would require even more Federal action to contain inflation. Some economists would argue that the large-scale stimulus checks in 2020 and 2021, the Paycheck Protection Program (PPP) program, the CARES Act, etc., did contribute to the increases in inflation we have experienced.
Is the Fed now in a position where they have to choose between maintaining the financial system or curbing inflation?
Robert Wescott: A tradeoff has emerged. Before the Silicon Valley Bank issues, the Fed was on track to raise the federal funds rate by 50 basis points. But in the end the Federal government raised the rate by just 25 basis points. Clearly it was worried about squeezing the financial system too hard. The Federal government’s rotation in the direction of having to pay attention to financial stability likely will mean somewhat higher inflation in 2023 and 2024 than otherwise would have been the case.
Any thoughts on hydrogen fuel growth?
Robert Wescott: Hydrogen fuel is getting a lot of federal support in the Inflation Reduction Act, but it is also getting private-sector investment attention as well. There are different ways of making hydrogen—blue hydrogen from natural gas, green hydrogen from wind or solar electricity, etc. Early uses will be in industrial processes—especially for heavy duty heat processes. Over time, it is expected to find uses in heavy-duty trucking and then as a fuel for airplanes. So far, batteries seem to be winning the market for light-duty vehicles, but we’ll see.
Do you think the prime rate would go up as well?
Robert Wescott: Generally the prime rate rises in line with the overall movements in the federal funds rate. Tightening by the Fed should mean pretty much a one-for-one increase in the prime rate.
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