Credit crisis affects even conservative banks
The second wave of the credit crisis is hitting the U.S. banking system, affecting even well managed and conservatively financed banks, even credit unions whose membership is made largely of federal employees. The first wave, of course, was made of institutions, like Countrywide Financial and Bear Sterns, who were caught up in the subprime lending fiasco where money was loaned irresponsibly to people who were unlikely to pay back the loans in a tough economy. In the second wave, banks who did not engage in subprime lending are being hit, and hit hard. You’ll want to take a close look at your bank and double check that your deposits are properly insured by the federal government.
Here are the reasons this fiasco is hitting even well run banks, thrifts, and savings unions:
1. The economic downturn has made it harder for people to pay off their loans.
2. The banks have had to increase the interest they have to pay out to depositors so that they can compete with subprime lenders desperate for deposits needed to cover their subprime loan losses.
3. The banks became highly leveraged (a higher number of loans to deposits) as they were lulled like everyone else into thinking that the economic expansion would last forever.
The National Institutes of Health Federal Credit Union is an example of a perfectly fine credit union having a tough time of it, despite avoiding subprime lending. From 2003 to 2007, their delinquent loan ratio has nearly doubled from 0.43% to 0.82% while the loan to deposit ratio has gone from 58.60% to 94.47%. At the same time, they’ve had to pay 4% or more on their money market funds. The net result was a net income of only $4,291 last year, in part because they increase their reserves to cover loan losses. This year doesn’t look any better.
