There are many reports suggesting a “discretionary recession” is coming, so we thought we would ask “Is Your Credit Union Ready for a Discretionary Recession?”
Discretionary Recession: What Credit Unions Need to Know
A discretionary recession is a period of economic contraction that is caused by a decline in consumer spending. This type of recession is often characterized by rising interest rates, which make it more expensive for consumers to borrow money. As a result, consumers may cut back on discretionary spending, such as travel, entertainment, and dining out.
How discretionary recessions affect credit unions
Discretionary recessions can have a significant impact on credit unions. This is because credit unions rely on consumer lending to generate revenue. When consumers cut back on their spending, they are also less likely to take out new loans. This can lead to a decline in loan originations and a decrease in interest income for credit unions.
In addition to the impact on loan originations, discretionary recessions can also lead to increased loan defaults. This is because consumers who are struggling to make ends meet may be more likely to default on their loans. This can lead to losses for credit unions and can make it more difficult for them to lend to new borrowers.
How discretionary recessions differ from regular recessions
Regular recessions are caused by a decline in aggregate demand, which can be due to several factors. Discretionary recessions, on the other hand, are caused by a decline in consumer spending. This can be due to many factors, such as rising interest rates or a decline in consumer confidence.
How credit unions can mitigate the impact of discretionary recessions
There are some steps that credit unions can take to mitigate the impact of discretionary recessions. These include:
- Reviewing their lending policies: Credit unions should review their lending policies to ensure that they are appropriately risk-managed. This may involve tightening their lending standards or increasing the collateral required for loans.
- Focusing on core deposits: Credit unions should focus on attracting and retaining core deposits, such as savings accounts and checking accounts. These deposits are less likely to be withdrawn during a recession, which can help to stabilize credit unions’ balance sheets.
- Investing in technology: Credit unions should invest in technology that can help them to automate their lending processes and to manage their risk better. This can help them to reduce costs and to improve their efficiency during a recession.
In addition to the above, here are some specific things that C-level executives at credit unions can do to prepare for a discretionary recession:
- Start by conducting a comprehensive financial analysis of your credit union. This will help you to identify any potential vulnerabilities and to develop a plan to mitigate those risks.
- Review your lending policies and procedures. Make sure that your credit union is only lending to borrowers who are creditworthy and who have a good chance of repaying their loans.
- Build up your reserves. This will give you a cushion to fall back on if loan defaults increase during a recession.
- Communicate with your members. Let them know that you are prepared for a recession and that you are committed to helping them through it.
By taking these steps, C-level executives at credit unions can help to ensure that their credit unions are well-positioned to weather a discretionary recession.
I hope this blog post has been helpful. If you have any questions, please feel free to contact us, and if you want the best forms on the market to keep your credit union compliant be sure to see our documents and form.
