By Ray Birch
ARLINGTON, Va.—Could loan losses from the pandemic-driven economic crisis exceed those of the Great Recession? One analyst said credit unions should at least consider that possibility as they set aside reserves now for the significant increase in defaults expected later this year and in 2021.
Curt Long, NAFCU's chief economist and vice president of research, cautioned that the recent Federal Reserve stress test for major banks foreshadow a great deal of trouble down the road.
“If you look at the Federal Reserve's stress test they released in July, and you look at the different scenarios for loan losses that would follow under different models—three different models based on how the economy evolves out of this pandemic—all three of the models spit out loan losses that are a little bit higher than the losses we saw during the Great Recession,” said Long.
Long’s insights are part of a week-long series in CUToday.info on the forecast for the second half of 2020 and beyond.
Long pointed out those stress tests were for the nation’s largest banks, so the findings may not accurately translate to credit unions and what they might expect in terms of losses.
“But this (potential for big losses) is something that should at least be on the minds of credit unions as they are reserving,” said Long. “And they should also be thinking about how examiners might view their levels of reserves.”
As other analysts in this week-long CUToday.info series on preparing for the second half of the year have noted, credit unions will all face varying levels of losses due in part to the impact of the pandemic and the recession on their fields of membership.
“There will be a great deal of disparity between the effects on memberships,” said Long. “Credit unions will have to work through this uncertainty.”
Concern Over Forbearances
Long shared concerns about credit unions extending loan forbearances to members, with many extending forbearances granted earlier for another three months. He noted credit unions can’t account for those loans as being delinquent, and as a result may have to brace for is many of the loans in forbearance going south at the same time.
“That’s when your loan losses could really shoot up,” Long said.
Long told CUToday.info if credit unions are looking for some sort of indicator on which to base their reserving they should consider the number of people out of work—with a caveat.
“Looking at historical data, the single-biggest indicator for delinquencies and loan losses is the unemployment rate,” said Long. “When you line those up, side by side, unemployment and delinquencies typically track pretty closely. However, I think what makes this current situation difficult is its uniqueness. The fact that so many of the layoffs are temporary, and I know that situation may be changing, but these temporary layoffs may not harm households and their ability to meet their financial obligations as layoffs have in the past.”
Keeping Households Solvent
In addition, Long emphasized, there has been a very strong bipartisan response from Congress to help consumers.
“The CARES Act has tried to keep households solvent throughout this crisis,” he said.
Long noted credit unions headed into the pandemic with loan loss reserves in a better place than they were before the Great Recession, with many credit unions having bolstered reserves following lessons learned from that previous economic downturn.
Curt Long
“I think a positive is credit unions had a little more cushion in reserves prior to this economic crisis, about 20 basis points more,” said Long.
Ongoing Plodding
As for the overall economy, Long said NAFCU is predicting it will plod along.
“We’re expecting pretty tepid growth for the rest of the year,” said Long, citing uncertainty in consumer confidence with states reopening and then closing again, and simply the unknown duration of the pandemic and the effects of COVID-19. “We’ve seen kind of V-shaped recovery so far, but in looking at the data I don’t think that's going to last. We’re already starting to see a little slowdown in the recovery. Until we get a vaccine the recovery is going to be pretty modest.”
More in this series: