DENVER-Conditions have improved in recent months, but Jeff Post warns credit unions still face "many economic torpedoes in the water."
Post, who is president and CEO of CUNA Mutual Group, Madison, Wis., said those torpedoes include employment shock, a second debt/credit market crisis, interest rate spikes, energy shocks, the global environment, and impacts of new regulations.
The unemployment rate, he told NASCUS' annual meeting here, may have become a systemic issue in the U.S. as more jobs are outsourced and technology replaces others (such as tellers being replaced by technology within CUs).
"How much that moves forward clearly leads to questions about system employment," he assessed.
Much as been written about the "fiscal cliff" that could potentially trigger $670 billion in both tax increases and cuts to federal spending, and the possibility of a second U.S. recession in 2013. Post said if the cliff is not resolved by the end of the year, as companies face uncertainty they will not hire people.
"The employment-to-population ratio is under 60%, the lowest since records have been kept," he said. "The jobs recovery has taken longer than any other post-World War II recession. Many jobs in construction and real estate likely are gone forever. Government cost-cutting will continue adding to economic headwinds, and deteriorating employment could further dampen consumer sentiment."
According to Post, the world economy has a credit crisis-but people are doing a "good job of ignoring it." There have not been interest rate spikes in the U.S., he said, because "we are the cleanest of the dirty shirts." How bad are things on the other side of the pond? In Greece, Italy, Portugal and Ireland government debt exceeds 100% of GDP, and several other countries in the Euro zone are at 80% to 99%.
Will The Euro Survive?
"I think there is a decent chance the Euro will not survive," he declared. "European and Japanese banks remain vulnerable because they are undercapitalized. The banks in the U.S. are in the best capital situation, with emerging markets in second."
The 10-year U.S. Treasury rate is in "uncharted waters," and interest rates at the low levels seen in recent years are a "drag on the economy," Post insisted. Although low rates generally stimulate the economy, he said they have been so low for so long most consumers have already taken advantage and refinanced their mortgages.
"Going back 311 years, since the Bank of England began tracking rates, they have never been this low," he reported. "The question becomes: how long can the U.S. government sustain interest rates at this level? The concern we have is when the game is over, the game is over, which could lead to a spike in interest rates. When rates rise they tend to rise quickly."
Every credit union is scratching for every basis point of interest income, Post said. Not surprisingly, many credit unions have increased the percentage of real estate loans on their books, which he said has led to concern over exposure to interest rate risk.
Regulatory Burden, Rapid Evolution
New regulations are affecting credit unions, regulators and insurance companies such as CUNA Mutual, Post said, noting a recent bank executives survey found the burden of regulations was the No. 1 concern. A CUNA Mutual survey of credit unions found loan volume was the No. 1 concern of CU CEOs, followed by compliance, then generating income.
"The financial services industry is evolving, and the evolution today is at light speed," he said. "Some of the competitors credit unions faced in 2008 are gone, such as WaMu, but many new competitors have emerged."
As an example Post offered docomo, a Japanese company that allows consumers to swipe their phones to pay for just about anything. "This has taken mobile wallet one step further," he said.
ISIS mobile wallet does not have credit union representation-meaning CUs are on the "outside looking in" on an important technology, he warned.
"The U.S. lags the rest of the world in mobile banking penetration, but that won't last forever. The growth of spending on smart phones could end credit cards in 10 years or less."
The good news: while there are torpedoes in the water, as long as CUs have a value proposition members believe in and a financial model that is efficient, they are "strong and profitable," Post said.
"The cooperative model naturally lends itself to a long-term view, rather than maximizing short-term profits," he asserted. "But now is the time to engage in long-term strategic planning, including identifying scenarios that could impact the credit union and take steps to mitigate that impact."