Washington was embroiled in a game of fiscal chicken at the end of the year. Unemployment is high at 7.7%. The 2.5 million people who are unemployed but so discouraged that they're not actively looking are unchanged from 2011. November's month's trade deficit ticked up, which is a worrisome sign.
And behind it all, Ben Bernanke is busy. He has, for the first time, tied the Federal Reserve's low interest rates to a 6.5% unemployment target. And in the face of an insistent economic funk, the Fed's latest round of quantitative easing uses $85 billion of monthly monetary kindling to do what many credit unions would also like to do: put capital to productive use in the real economy.
The U.S. economy is struggling to catch fire after years of recession and slow growth. One of the essential components of economic energy, business lending, is simply hard to come by. A November survey from the National Federation of Independent Business shows that "more [small business] owners expect that it will be harder to arrange financing than easier." The Federal Reserve's October survey of senior bank loan officers shows that while credit is slowly easing, it is still hardest to come by for small firms. Kindling needed.
In a recent Filene report, David Smith, an economist at Pepperdine University's Graziadio School of Business and Management, took a crack at the credit union business lending question by quantifying the performance of credit union commercial lending at a time when credit unions seek to widen their access to the business lending market.
In an earlier Filene study, Smith showed that credit unions are surprisingly resilient to the downside of the business cycle, especially compared with commercial banks. According to that study, credit unions' aggregate loan portfolios appear to be about 25% less sensitive to macroeconomic shocks than those of banks.
His recent examination of commercial lending uses a similar methodology to examine business lending, a topic that has seen far less comparative research. Starting with high-level trends in lending, the analysis goes on to compare commercial lending delinquency and chargeoff data from banks and credit unions, with special attention paid to how the two portfolios compare during unemployment spikes in the business cycle.
It shouldn't surprise you that credit unions' record is good.
While credit unions, as an industry, are newer to commercial lending, their delinquency and chargeoff rates compare favorably to those at commercial banks – scoring as well as or better than banks on both counts in almost every quarter studied.
Credit union commercial loan growth has been steady during the 15 years examined by Smith. More importantly, it has been resilient during the last two recessions, suggesting that credit unions can buoy both lending growth and, as a consequence, overall business activity.
While banks tend to contract commercial lending during economic stress, the opposite is true for credit unions. Commercial loan growth rates for banks turned negative following the recessions beginning in 2001 and 2007, but credit union growth rates remained positive during both periods.
Despite the positive trends noted above, commercial lending, as measured by delinquency and chargeoff rates, is more sensitive to the business cycle for credit unions than it is for banks, which is a potential cause for concern and further study.
The slight rise in delinquencies seems to be attributable to the rise in overall commercial lending activity, indicating measured risk on the part of credit unions. Regardless, and most importantly, the data clearly show that credit unions continue to offer business loans when others retreat.
If the economy needs as much kindling as possible, shouldn't credit unions be able to help? Opponents of the loosened standards argue that increasing credit unions' ability to lend to businesses goes against their historical mandate and should threaten their tax-exempt status, arguments that are beyond the scope of Smith's analysis. What he does, instead, is address is the argument, echoed as recently as June 2011 by Stephen Wilson, Chairman of the American Bankers Association, that "business lending is risky and raises serious safety and soundness concerns."
If you'd like to peer more deeply into Smith's data and argument and if you love statistics, please download the full report.
At a time when we cannot count on responsible behavior from elected leaders and even the Fed thinks the economy needs kindling from any corner, credit unions' stable commercial lending history shows they are a helpful source.
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