C. Myblog

Lower Earnings Or Increased Interest Rate Risk?

March 31, 2011

If there is one thing to be said infallibly about risk management, it is never black and white.  The historically-low rate environment coupled with mostly-anemic consumer loan demand has put increased pressure on credit union margins across the nation; moreover, many are reaching their floor with regard to lowering deposit rates.  In light of the real threat of rising interest rates, decision makers must strike a delicate balance between the risk of reaching for yield and accepting lower ROA and net worth ratios in favor of managing interest rate risk.  Adding more urgency to the issue is the recent release of NCUA’s proposed rule/guidance amending regulations focused on protecting against interest rate risk.

If you’re feeling the squeeze on your margin like many in the industry, remember that current earnings are not an adequate indicator of success, safety or soundness.  As regulator scrutiny increases, it is critical to identify how your long-term risks to earnings and net worth could change considering your current strategy, potential decisions under consideration and bad-case stress tests.  Too much focus on the margin, and yield specifically, may invite excessive interest rate risk.

  • Ron Flaherty

    You are correct, it is a delicate balance. Rates are going to go up and we need to be prepared for that even at the expense of current earnings.

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