By Ray Birch
WASHINGTON—Forget the national unemployment data and don’t look back to the Great Recession for guidance on loan losses. Instead, what credit unions really need to pay attention to adequately reserve for charge-offs heading their way are local conditions driven by the pandemic, according to one expert.
That’s advice from Mike Schenk, deputy chief advocacy officer and chief economist at CUNA, who says said the current economic environment is so different prior scenarios, and its effects will be so varied by location and field of membership, that only local data will work when it comes to preparing the balance sheet for what’s to come.
Capturing the insights needed will require credit unions to research the impacts of the pandemic in their local markets, as well the effects on unemployment within the membership and local market areas served, he added.
“I have been saying that while CUNA is sharing a national forecast for credit unions, and we have been regularly updating it, my recommendation is to ignore the national forecast, because what's going on at the local level, more than likely, is much more indicative of what you're going to be dealing with in the coming months and next year,” said Schenk. “That is what is really going to matter.”
Schenk’s insights are part of a week-long series in CUToday.info exploring different scenarios for which credit union leaders must be prepared in the second half of the year.
A Good Place to Start
One of the first data points at which to look when forecasting local markets is the question of whether the local coronavirus case curve is flattening, or is the virus still spreading, said Schenk.
“Determine the course of the pandemic in your backyard,” advised Schenk. “Find a website you like, say Johns Hopkins. It’s a great website that will have local data on the pandemic. Or go to the CDC site. There are a number of different websites you can get data at the county level. And you don't want to be looking at the state or national levels. You want to look at the data where your members are located and where your offices are. You can do this on a daily basis. The sites have real-time data and you can see whether the curve of the pandemic is flattening locally or not.”
Looking to the local data will provide credit unions a better perspective on how businesses and jobs might fare in the coming months, and likely how delinquencies and charge-offs will progress, as Schenk noted delinquencies and charge-offs typically mirror the unemployment rate.
Again, Schenk cautioned CU leaders from turning to what may have worked in the past, such as during the Great Recession when credit unions could look at the national jobless rate and make assumptions.
That’s not the case during the coronavirus pandemic, he said, stating each CU’s provision for loan loss decisions should be based on local employment conditions.
“That means unemployment within your field of membership, and it also means unemployment within your county,” said Schenk.
Looking Deeper
As CUToday.info has reported, some credit unions are watching checking accounts for ACH deposits to determine how many members are out of work.
Buy county unemployment numbers are important, as well, said Schenk, as they are an indication of the overall health of the local marketplace.
“For example, someone works at a restaurant and they are still employed. But because of high unemployment in the area, they are now making less in tips,” Schenk said. “There are a number of different resources credit unions can look at here.”
Schenk said state websites provide almost real-time unemployment data at the state and county levels. He acknowledged credit unions this time will have to do a little more digging to determine what’s ahead for their shop.
“They have to put a little more of a fine a point on their data,” he said. “And this is really important, of course, for any credit union with a narrow field membership.”
Mike Schenk, CUNA
The One Advantage
The big advantage members have during this economic crisis over the Great Recession, according to Schenk, is they went into the crisis with their personal balance sheets in much better shape than right before the financial crisis of more than 10 years ago.
“Consumers generally went into this downturn in great shape financially,” said Schenk. “Their financial and non-financial assets were very close to cyclical highs. Investment in the equity markets have held up pretty well so far. Home prices are still increasing, at about 2%—a little bit slower than what we saw pre-pandemic. There still is growing demand for housing. And there is also good news on the other side of balance sheet—exposure to debt. I know there was discussion of debt levels being high going into pandemic, but relative to income that level was very low—at about a 30-year low. People's household net worth ratios were very close to all-time highs going into this mess.”
More in the series: