From rising inflation, rate hikes, and a slowdown in growth across U.S. financial institutions, all signs are pointing to a looming economic downturn. According to S&P Global Market Intelligence data, total deposits across the industry were up 1.2% quarter over quarter – the weakest growth since the third quarter of 2020. Additionally, total loans and leases increased 1.0% in the first quarter – down from the 3.0% growth rate in the previous quarter.
Consumer spending is also starting to slow, across both goods and services. Bloomberg reported that while earlier this year, many strategists expected consumers to ramp up vacation traveling and go out to restaurants more often, that hasn’t been the case for the last six weeks. Services spending grew only 15% from the same period in 2021, compared with roughly 30% earlier this year.
An economic “hurricane” is headed our way, predicts Jamie Dimon, JPMorgan Chase CEO, citing rising inflation and interest rates and the war in Ukraine.
Is he right?
History has shown us that the economy is cyclical. Defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales,” we’ve seen 11 recessions since 1945, according to the Bureau of Economic Research. It is therefore reasonable to expect another recession very soon.
However, not every downturn is the same. Some are worse than others, warranting a section in history books, like the Great Depression and Great Recession. Other downturns are much smaller and fade from our memories over time.
The challenge is that we never know which type of downturn is coming. We can forecast and closely monitor, but the events that precipitate these crises are beyond our control.
More importantly, we can’t prevent them. We can only mitigate their impact on our institutions.
Lessons from the Last Downturn: Which Institutions Thrived?
To prepare for the future, it helps to look at the past.
The Filene Research Institute did just that in a 2019 study. It wanted to know what separated organizations like credit unions that “thrived” during the Great Recession from those that merely survived. Like the credit unions before them that guided Americans through World Wars, the Great Depression, and other economic crises, these institutions were sources of stability during tumultuous times.
The study found that resilient organizations:
- Focused on growing through the downturn instead of adopting a defensive position,
- Invested in technology to optimize operations, and
- Took a long-term perspective that helps identify growth opportunities.
The report recommended credit unions “take smart risks ahead of and during a downturn, keeping in mind that can include staying the course and not retreating from your business plan.”
What can we learn from this?
Long-term, consistent success requires playing the long game. Maintaining a strong institution isn’t just about strategy for the next quarter, it is about managing the big picture and making strategic decisions today with a view towards what is down the road.
What does your credit union envision for itself and its operational environment over the next few years? Does it see loan demand increasing? Opportunities in new markets? Innovative fintech partnerships or new technology initiatives? Plans to take customer service to the next level of excellence? A more complex compliance environment? Ongoing cybersecurity challenges? Rededication to business resiliency? Improved financial literacy efforts?
The only way to reach these goals and face these challenges is with foresight and planning. It’s steering a course towards strategic success, knowing there will be bumps along the way. Your credit union can’t reach its goals if it doesn’t follow its plan.
In a competitive landscape, there are plenty of institutions who are taking the long view, and they will be in the best position to take advantage of the inevitable recovery. (Remember, the economy is cyclical so recovery will come after every downturn.) Credit unions that choose to postpone technology initiatives that would make them more strategic, responsive, efficient, and compliant will be at a disadvantage when competing with institutions that have already undertaken these initiatives. Rather than focus on winning new business and the next strategic initiatives, they’ll be playing catch up.
Preparing for Another Downturn
There is no way to know the severity of the next downturn. What you can do – and should be doing right now – is ensure that your risk management team has the knowledge, expertise, and tools to position your institution for success.
These tools should focus on the risk management life cycle. Make sure you have a framework in place to:
- Identify risks. What events could potentially impact your institution?
- Analyze risks. How likely are these events and what’s the potential impact?
- Mitigate the risks. Develop controls to limit the likelihood or impact of the risk.
- Monitor. Pay attention to key risk indicators (KRIs) to understand whether your controls are successfully mitigating risks or whether changing circumstances require new or modified controls.
- Report. Make sure those in charge, including management and the board, are aware of any significant developments.
Don’t let a potential downturn stand between you and your credit union’s goals. Whether your risk management team is bright and new or experienced veterans, you must have the tools in place to oversee the entire risk management lifecycle. It’s the only way to ensure growth during the next recession with limited risk to your credit union.