The Standard & Poor's 500 Index fell to 1,199.38, down 7.2 percent from last Friday's close, its worst week since November of 2008 (MarketWatch Aug. 5). Many analysts said the dive was due to the failure of policymakers to stabilize financial markets and investors crumpling under the strain of a worldwide economic slowdown (The Wall Street Journal Aug. 5).
What is the consumer-confidence effect of the market plunge on credit union members?
"A little bit more than half of U.S. households have a direct or indirect interest in the stock market," Mike Schenk, vice president of research and statistics for the Credit Union National Association (CUNA), told News Now. "The stock market going down affects net worth, consumer sentiment and the willingness and ability to spend money."
Historical data indicate that in situations similar to what happened last week people react with a lag and basically sell on the bottom--precisely when they shouldn't be selling. "Usually the consequence is you see flight-to-safety flows, and that should cause demand for savings balances to go up at credit unions, and also banks," Schenk said.
Will a declining stock market impact credit unions' pricing on loans and deposits?
Deposit pricing keys off the Fed Funds rate, which was near zero on Friday to begin with, Schenk said.
"At least one bank is charging customers for deposits--that basically is a negative interest rate in which customers are paying banks to take their money," he explained. "No credit unions are doing this that we know of."
"However, it is conceivable that credit unions that have seen really fast deposit growth may try to limit deposit growth in the current environment," Schenk added. "Some credit unions that have already experienced fast deposit growth have seen net-worth ratios decline, and they may drop pricing even closer to zero."
Although Schenk doesn't expect drastic changes in loan pricing by credit unions, mortgage loan pricing is determined by the secondary market and is near historic lows. Therefore, credit unions involved in mortgage lending will drop their rates, or ignore rate declines and basically originate mortgages for a short period of time or else significantly curtail mortgages, he said.
Should credit unions do anything right now in response to a large stock market tumble?
"It's unwise to assume that this is the new normal," Schenk said. "There's a lot of uncertainty in the marketplace, but a lot of it has declined recently--more stability in the Middle East, fewer weather-related disasters, and the Japanese manufacturing supply disruptions have worked themselves out.
"Our [CUNA's] baseline view is that this is likely to be an extended soft patch--a slowdown in the middle of a sustainable economic recovery."