Savings Trend a Long-Term Threat

Dave Colby, Chief Economist, CUNA Mutual
December 28, 2004

Slower savings growth presents dual challenges for credit unions.

For one, as loan demand rises, liquidity can become a concern. That's obvious enough, however, credit unions can adjust deposit and loan rates and standards if and when the need arises.

The other challenge is more intractable. It appears that members view savings and the equity markets as substitutes. The graphic below shows a significant inverse relationship between credit union savings growth (line, left scale) and equity market values (shaded area, right scale). As the S&P 500 index fell, member deposit inflows surged, demonstrating what is often called the "safe haven" effect, where money flows from riskier equity investments to safer deposit accounts.

We recently have seen a sharp slowdown in savings growth. Where is the money going? Given historically low deposit yields and a firming in the equity markets, we believe more member dollars are flowing into the equity markets. Remember, we all have a lot of catching up to do for retirement and college savings nest eggs.

Here's the big question for credit unions: Which organizations are members using to buy their equities and mutual funds? Given that most financial firms are now brokerages and banks, some of credit unions' best member relationships may be walking out the door in search of returns.

Credit unions need to offer products and services that will keep those assets under their roofs. If that challenge isn't met, credit unions won't have to worry about liquidity.

Dave Colby is chief economist of CUNA Mutual Group. This article first appeared in Added Dimensions, CUNA Mutual’s online publication for credit union leaders at http://www.cunamutual.com/cmg/addedDimensions/home/0,1775,9057,00.html. Reprinted with permission.