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Pandemic Preparedness

What do we do now?

We have witnessed one of the more unusual events in modern financial history. Interest rates have fallen dramatically, finding yields that have never before been seen. Events causing this move are well documented elsewhere and are not going to be repeated here. Rather, we would like to focus on the reactions we have from here.

Never has the benefit of creating a clear, calculated plan been more obvious than in a market like this. Having a clear understanding of our forecast financial performance in many rate scenarios, including the current environment, is helping credit unions focus on enhancing their risk position. Those who have carefully measured financial performance and acted to perform in even the most unlikely scenario can rest assured that they are on track for better times. 

It’s not too late to refocus our efforts. Cash balances are likely building again as depositors feel fear again and flock to the safety we have always provided them. If you are on the fence, seriously consider taking the time to develop a benchmark. Taking the time now can avoid the uncertainty of not knowing what to do next. 

Equally important is to avoid the big mistake. Trying to catch yesterday’s rate today will force us to investigate areas we would not have considered before. Taking on new risks, longer maturity, new credit risk, new structures, or other choices can be like trying to catch a falling dagger. We will be tempted to look at higher risks using a yield target rather than a balance sheet target. 

Now, more than ever, we need to focus on our mission. We aren’t here to outperform other credit unions’ investment portfolios. We are here to help our members get what they need. Providing a balance sheet that enables us to focus on our members by producing predictable returns in many rate environments and providing high liquidity comes first. We are here to help with the process, now and in the future.

How QuantyPhi Can Help

QuantyPhi will provide up to 8 hours of free consulting work, including loan modification strategies, credit deterioration analysis, and stress testing of your loan portfolios. The past two months proved to be quite chaotic for credit union CFOs. Despite a world in quarantine, events and market movement unfolded at a rapid pace. We were able to witness another “once in a lifetime” event as details of the $2 trillion Coronavirus stimulus package were released. Credit unions shifted from the discomfort of excess liquidity with rates inside of ten basis points to a concern about how allowing members to skip loan payments while line of credit draws increased might affect liquidity going forward. Both the equity and bond markets continued to see large volatility on a day-to-day basis. Participants scrambled to figure out how the world and domestic economies will be able to recover from an almost complete shutdown. Adding to the absurd, the crude market offered another “once in a lifetime” event as oil prices went into negative territory as the April contract ended. Yes, you could have been paid to accept free oil – if you had somewhere to store it.

Inside the chaos, one fact surfaced that has reenergized all of us at QuantyPhi. It was apparent that credit unions that had taken the time to analyze their balance sheet and formulate a plan were well positioned to get through the fog. While not expecting rates to fall as quickly as they did in March, they were still prepared. While the volatility of the markets soared in April, their handle on risk allowed them to quickly identify what worked for them and what they needed to avoid. History tells us that time and effort forecasting interest rates will generally prove to be no better than a coin flip. What we again witnessed is that time spent to understand the strengths and weaknesses of your credit union’s balance sheet, and formulate a plan to manage it, will prove extremely valuable especially in times of chaos.