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Borrowing Rates Are Up– Now My Credit Union Has Less Risk?

August 9, 2013

Net economic value (NEV) is often cited as one way to quantify the interest rate risk exposure of a financial institution. While there are many concerns with relying upon NEV to provide good decision information, this discussion focuses on recent changes in interest rates and the resulting impact to the NEV of credit union shares.

As borrowing rates have increased for nearly all borrowings with final maturities of two years and beyond (increasing roughly 15-90bps from March 2013 to June 2013), the resulting discounted cash flow calculations for non-maturity shares produce increased share valuations all else being equal, and may show significantly stronger NEV ratio positions in today’s interest rate environment.

If credit union management uses NEV analysis to aid in decision making, an important question must be asked: Does my credit union really have less risk today than we did last quarter because borrowing rates have increased?

Or, more importantly, has the continuation of relatively low interest rates and tough competition for loan dollars placed more pressure on your financial structure, potentially increasing risk to earnings and net worth?

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