Emotional Intelligence

Emotional Intelligence: Overcoming Fear and Greed

Throughout history there have been many economic peaks and troughs. There have been both significant and minor swings. Over the past five years, we have witnessed the worst recessionary swing in history and it was still one-sixth of the decline during the Great Depression. The two primary emotional culprits are fear and greed. One of the early documented financial bubbles that led to a catastrophic burst was Tulipomania.
​Tulipomania originated in the early seventeenth century in the Dutch Republic when optimism was on the rise, textile trade was booming, and housing was expanding as mansions began to spring up seemingly overnight. The desire of people to chase after the illusive bulb producing black tulips led to foolish gambling rather than looking at the facts to see how they differ from historical trends and in most cases, common sense. The bubble was burst by the discovery that black tulips could not be replicated and later that they were actually caused by a fungus. It is also important to note the pendulum of irrationality swings both ways. Tulipomania gave way to Tulipophobia, providing opportunities for the value investor who focused on the facts versus emotional swings between fear and greed.
Recently in the Credit Union Times, the NCUA Deputy Director stated the paradigm of the trade-off between risk and reward holds for credit unions as well. He stated that credit unions that took more risk ultimately made more money. The article can be found at http://www.cutimes.com/2012/10/07/ncua-examiners-look-at-the-bigger-picture. I know this may be surprising; not the relationship of risk and reward but the fact that leadership at NCUA is stating credit unions should be taking more risk to make more money. This is evidence that NCUA is recognizing what we are seeing across hundreds of credit unions in the United States. When analyzing financial performance ratios and balance sheets, bottom lines are improving throughout the country. However, when looking at the details, there bottom line is misleading. Most credit unions are experiencing improved earnings only due to decreasing provision for loan loss expense and further reductions in cost of funds. The NCUA is recognizing this and attempting to communicate that our industry needs to grow revenue through lending. One of my mentors once said, “in order to have an extraordinary lawn, you must focus on growing grass versus killing weeds.” We can apply this today, as only focusing on killing weeds will leave our yard spotty with weak grass susceptible to more weeds. We must go back to basics and execute our forefathers’ wishes of serving those of modest means. NCUA also communicates this on their website at: http://www.ncua.gov/Legal/Pages/FCUAct.aspx. The pendulum is starting to swing with Chairman Matz's comments about examiners taking a more sensible approach in helping credit unions increase their ability to serve their communities.
We cannot afford to put our members through what we experience with the pendulum swinging. We must find ways to manage risk appropriately and implement a discipline of best practices within our organizations. This is the reason Lending Solutions created HYLS, a web delivered solution to act as both a underwriting tool and a risk management tool. HYLS was originally coined as “High Yield Lending Strategy” but recently a brilliantly creative President/CEO of a $2 billion credit union called it “How you lend smart.” I agree with her statement as it is a forced discipline in underwriting to help as many people as possible while managing the risk for the organization and operating as an effective cross selling tool. HYLS looks at 27 factors versus the traditional models’ 5 factors while providing support for the front line to use for better interviews resulting in more effective decision-making. HYLS should be integrated in operations and noted in ALM policies as a tool to effectively manage risk. Soon you will see communication from LSCI on best practices to implement HYLS as a risk management tool. The examiners have already commented about how HYLS accompanied with appropriate training provides outstanding results in serving membership and increasing safety and soundness. Also, one of the credit bureau's recently stated HYLS is a better predictor of bankruptcy and recommended the tool for a credit union versus their product offering.
As we start and finish the planning session season, remember that we only have so many grains of salt and we need to use them wisely. I believe authentic leadership in our industry today can convert our industry back into something much larger--a movement. As leaders in the industry, we need to hear NCUA’s recommendation and go back to our roots of people helping people. I recommend spending time reflecting on why and how we were founded, to promote thrift and provide credit to those of modest means. NCUA is doing their part to swing the pendulum in the other direction with communications and actions to increase the number of Low Income Designated Credit Unions. Remember, we may only be one person to the world, but to one person we can be the world!

Changing the world from Pensacola,
David Tuyo