Government shutdown could inhibit credit quality

While serving their members, credit unions may feel the economic strain from what has become the second-longest government closure in U.S. history.

Since the partial government shutdown started on Dec. 22, credit unions nationwide have jumped at the chance to assist the 800,000 employees who are furloughed or working without pay. This includes offering no-interest loans, allowing members to skip a loan payment, and providing payroll assistance.

But these programs may not be sustainable if the shutdown drags on, and credit unions could see delinquencies tick up.

Randolph-Brooks Federal Credit Union SVP Miguel Maldonado told American Banker's John Reosti that "depending on how long the shutdown is in effect, we could see some negative impact to the program and the economy." Maldonado added that the delay "can affect small businesses and their ability to operate or even get off the ground."

During the government shutdown, those seeking loans through the SBA's programs might instead turn to high-cost alternative lenders, Reosti wrote.

“We’ve had several furloughs over the years and so, at this point we meet as a management team along with our CEO and we try to gauge what the media coverage is, and what will be the effects to our members as far as timeline, financial impact, and any relationships and any other financial obligations,” said Chad Evans, senior vice president of lending at Associated Credit Union in Norcross, Ga.

Offering shutdown services is relatively low risk for credit unions, since government workers are some of the strongest borrowers, given that they're less vulnerable to economic cycles, said Diego Zuluaga, a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives. After all, the U.S. government won't collapse during a recession like a normal employer could.

As the shutdown continues with no end in sight, concerns about the potential long-term impact are becoming more pronounced.

Read more at Credit Union Journal.