Headline economic indicators for late 2025 paint a confusingly optimistic picture. GDP is growing, unemployment remains relatively low, and equity markets are resilient. However, the reality inside the branch or on member support calls tells a different story: members are stressed, liquidity is tight, and financial anxiety is palpable.
This disconnect is the hallmark of a K-Shaped Recovery.
A K-shaped dynamic sees the economy bifurcate. One segment of your membership is on an upward trajectory of wealth accumulation, while another slides into prolonged stagnation.
For credit union leaders and boards, this presents a unique governance challenge: In a K-shaped economy, relying on "average" data is dangerous.
The "Average Member" Fallacy
The greatest risk to strategic planning right now is the reliance on aggregate data.
Consider a community credit union with two members. Member A, a tech professional and homeowner, has seen their home equity rise and their savings grow by $50,000. Member B, a service industry worker and renter, has depleted their $5,000 emergency fund to pay for inflation-hiked groceries.
On your dashboard, the "Average Member Savings" has arguably increased. The aggregate data suggests stability and growth. In reality, half of that sample is in financial crisis.
If your strategic risk assessment relies on averages, you mask the distress of your most vulnerable members with the excess liquidity of your wealthiest. This creates a blind spot that hides potential delinquency risk and distorts liquidity planning.
The Anatomy of the K-Split
To govern effectively through this divergence, we must understand the drivers separating the two arms of the "K":
- The Upper Arm (The Inflation-Hedged): These members—typically in professional services, healthcare, or technology—have benefitted from asset inflation. They own homes, hold equities, and have locked in low, fixed-rate debt. For them, inflation is an annoyance rather than an existential threat.
- The Lower Arm (The Inflation-Exposed): These members—often in hospitality, retail, or the gig economy—are renters. They do not own appreciating assets; they only consume appreciating goods. They fight a war on two fronts: wage stagnation and the rising cost of living.
Recommended Resource: The Macro View
To understand the persistence of these inflationary pressures and the interest rate outlook, we highly recommend reading "Stubborn Disinflation" by Dr. Thomas Simpson. It provides excellent context on the macroeconomic environment driving this divergence.
The Strategic Risk: The Mixed Portfolio
While niche credit unions and CDFIs generally understand their specific exposure, the "Hidden Risk" resides in the mixed-portfolio Community Credit Union.
When a portfolio contains both Upper and Lower K members, the business model begins to distort in two key ways:
1. The Liquidity Paradox
You may find yourself awash in deposits from the Upper Arm (who are hoarding cash due to market uncertainty) while simultaneously facing a "cash burn" from the Lower Arm (who are drawing down savings to survive). This drives up your Cost of Funds (COF) without necessarily generating quality loan demand, as the Upper Arm is focused on paying down debt.
2. The "Prime" Mirage
Standard credit scoring is a lagging indicator. A member on the "Lower Arm" may still have a 720 FICO score today because they are prioritizing debt payments over everything else. However, if their disposable income has eroded due to inflation, they are functionally sub-prime. They are one car repair or medical bill away from default, yet current risk reports likely treat them as "Prime."
The Governance Imperative: "Help and Protect"
Navigating this divergence requires a dual strategy. We call this the "Help and Protect" framework, aligning the cooperative mission with safety and soundness.
1. Strategic Protection (The "Protect" Strategy)
Governance must move from looking at the whole to looking at the segments.
- Abandon the Average: Boards should request data segmented by member tiers (e.g., net cash flow or employment sector) rather than making decisions based on aggregate means.
- CECL as a Strategic Tool: Your reserve methodology (CECL) requires "reasonable and supportable forecasts." If specific sectors (hospitality, service) are suffering, your reserves must reflect that forward-looking risk, even if historical loss rates look clean. Beyond compliance, this is simply prudent risk management.
- Inflation-Adjusted Underwriting: Management should review how debt-to-income (DTI) is calculated. A 40% DTI today is riskier than a 40% DTI three years ago, simply because the remaining 60% buys fewer essentials.
2. Cooperative Assistance (The "Help" Strategy)
While we cannot lend our way out of a solvency crisis, we can structure relief intelligently to support the "Lower Arm."
- The Inflation Bridge: Instead of pushing high-yield credit cards, consider small-dollar, short-term liquidity products designed to bridge paychecks without predatory fees.
- Consolidation with Counseling: There is an opportunity to convert high-interest external debt (which hurts the member) into manageable credit union debt (which helps the member and secures a performing asset), provided it is paired with financial counseling to stop the cycle.
Conclusion: A Test of Identity
The K-Shaped recovery represents a fundamental identity test for the credit union movement.
Banks will compete fiercely for the "Upper Arm" of the K—the profitable, asset-rich segment. Fintechs will target the "Lower Arm" with high-velocity, high-cost lending. The credit union’s lane is the difficult middle ground: helping the vulnerable build resilience while offering value to the prosperous to fund that mission.
The first step to winning that battle is admitting that the "Average Member" no longer exists.
