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An economic storm is brewing. Credit unions must be ready

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The current economic expansion is now the second largest in United States history – marking 118 months and counting. If this trend continues through August, it will even exceed the expansion following the 1990 recession.

However, nothing lasts forever; economists are forecasting the impending end of the expansion and the beginning of the next recession.

Though no one can precisely predict the date or depth of a coming recession, credit unions can start proactively bracing for a downturn by putting strategies in place to weather any potential storm. By understanding past cycles, leveraging modern technology, properly training staff and sticking to their core values, credit unions will be well positioned to handle the effects of a possible recession with more confidence and ease while supporting their local communities.

Understanding the past to guide the future

Even though all recessionary cycles are different given the existing business and regulatory dynamics, studying past downturns can help us anticipate what’s coming next. For example, the Great Recession of 2008 taught us that credit standards will likely tighten during the next recession, portfolio growth will be challenged (especially for smaller financial institutions), businesses will turn away from commercial loans, and more diverse local economies are likely to fare better than those that are more narrowly focused.

Past recessions have additionally shown us that short-term credit, such as credit cards and small revolving lines, is typically the first to bounce back, so credit unions should ensure they have a wide range of financing available to suit borrowers’ needs.

The Great Recession opened our eyes to new competitors as well. Credit unions must keep a careful eye on alternative lenders during downtimes, as recessions present a significant opportunity for these lenders to emerge as traditional institutions shed weaker deals.

These lenders can appear attractive to borrowers because of their digital applications and quick decisions; credit unions must have the modern tools in place to deliver a fast, easy and intuitive borrower experience to compete.

Tips to weather any storm

In addition to gleaning information from past occurrences, there are more proactive steps credit unions can take to prepare their portfolios for the forecasted downturn over the next year or two.

The first may seem obvious, but it’s a critical one that’s often overlooked – credit unions should communicate with their members early and often. It’s no secret that economic downturns can be stressful for all, so credit unions must ensure they have open and transparent communication channels with their borrowers and members. This might include organizing tips and best practices for managing finances during the tough times and sharing the information through newsletters, the institution’s website and digital channels, and in branch.

Another method is for credit unions to invest in modern systems that will detect changing business conditions before credit officers typically could, including spreading tools that test the CRE portfolio.

One of the most significant differences between the last recession and the next is the availability of better, smarter loan origination, underwriting and portfolio management systems that allow credit unions to detect and decipher data trends more quickly and accurately. More credit unions today can streamline the loan application process and provide faster, better decisions, while seamlessly managing borrower relationships from one loan experience to the next. This is something savvy credit unions will use to their advantage, especially during downtimes.

Focusing on training credit officers, especially younger talent, is another way credit unions can prepare for a potential recession. The only recession younger lenders and business owners are likely to have seen is the Great Recession, and chances are, the next one will not be as deep or wide. Credit unions should make sure their teams are ready to navigate the field under any business conditions and offer plenty of support and guidance from more seasoned employees.

Institutions should strive to be more strategic regarding all lending activities leading up to and during a downturn. Evaluating the products that deliver the best return while managing emerging risks effectively will be a significant differentiator.

Credit unions should also rely on the profitability management systems they have (hopefully) deployed since the Great Recession to help protect margins. And, finding products that help businesses accelerate cash flow and working capital can help ramp up new business efforts post-recession.

Finally, credit unions must remember to stick to their core values during tough times. While recessions will likely impact approval rates for both consumer and commercial loan applications, institutions can still go the extra mile to help alleviate the strain on their communities. Economic cycles come and go, but relationships forged during tough times can last forever.

Community-based institutions like credit unions typically have an advantage over large banks during economic downtimes. Large institutions tend to make broad credit portfolio decisions that dramatically impact communities downstream. Credit unions, on the other hand, make decisions more locally, allowing them to better serve their local economies.

But they must be strategic to ensure this advantage is optimized. Effective communication, leveraging modern lending platforms and technology, training younger lenders, and sticking to core values can help credit unions better navigate both the good and tough times.

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