Look to the past to look ahead – Emily Hollis says credit unions need to learn lessons from previous crises to help them prepare for the next one.
Hollis, CEO of ALM First Financial Advisors, LLC, used clips from 2015 movie “The Big Short” to illustrate what can happen if risky behavior continues unchecked.
“All credit unions do strategic planning. They assess risks and set up a strategic plan,” Hollis said during a breakout session at the recent CU Leadership Convention in Las Vegas. “In assessing risks, it is important to know about all the different types of risks.”
A new risk that CUs may not yet be aware of is consumer expectations, Hollis continued. She said millennials are famous for feeling they are entitled to have all their expectations met, but this mindset is creeping into other generations, as well.
“Consumers see fees as abusive, even though many credit unions need to charge fees in a low-margin environment,” she observed. “Consumers are angry because free checking is going away, but credit unions must build and protect capital for the safety of all members, and the demands of regulators.
“Consumer protection laws have a cost,” she added.
Losses were unavoidable during the Great Recession, but the extent of those losses could have been mitigated, Hollis asserted. She said every check in the system failed to restrain the excess/greed, or to correct the delusional optimism.
Interest rate risk was not a cause of the crisis, she argued – it was credit risk.
“In 2006, liar loans made up as much as half of new mortgages,” Hollis said, explaining some 60 percent of home loan applicants exaggerated their income by more than 50 percent. “And no one checked! Many mortgages were not issued by banks, but rather by non-bank lenders – who held them only for a few days before selling them to securitizers.”
When the housing market crashed the federal government intervened, Hollis recalled. She said total estimated losses were a staggering $24 billion. “One hazard is investors expect the government will bail them out again in the future,” she said.
The Savings & Loan crisis of the 1970s was different from the Great Recession, Hollis continued. The S&L crisis started in late 1970s, came to a head in the 1980s, finally ending in the 1990s.
“That one was all about interest rate risk,” she said. “The Fed Funds rate was all the way up to 20 percent, while S&Ls were making money from low-interest mortgages. When there was a run of withdrawals, S&Ls had massive asset losses from forced sales. Of the 3,234 S&Ls, 1,043 failed, costing $132 billion in taxpayer dollars.”
Today, a diversified balance sheet is the “best defense against risk,” Hollis counseled.
“In the eight years since the Dodd-Frank Act passed there have been positives, such as increased reserves,” she said. “There is heightened awareness of corporate profitability, an enhanced focus on long-term business strategies, and large banks have to pass stress tests and clear their capital plans with regulators.”
