C. Myblog

Net Economic Value and Business Decisions: Do You Understand the Trade-Offs?

June 5, 2014

As a result of running a net economic value shares at par analysis, it appears that some examiners are trying to force credit union CEOs and CFOs to reduce interest rate risk in a rising rate environment by selling assets.

While we won’t argue that some credit unions should consider reducing interest rate risk, using net economic value to make this decision does not give decision-makers and examiners appropriate decision information.

The net economic value analysis will not show the hurt of replacing the asset sold with a lower-yielding, shorter-term asset. It will also not show the hit to earnings and net worth should the assets need to be sold at a loss. Additionally, no one involved in this type of decision will understand the breakeven point of this decision. In other words, decision-makers and examiners should gain an understanding of how high rates would need to go in order to be glad that the credit union took a guaranteed loss and reduced earnings today.

As we said above, it may be a good decision for some credit unions to restructure their interest rate risk profile while rates are still low. However, before taking any action, we encourage decision-makers to work very hard to ensure that they, and their examiners, thoroughly understand the impact of the direct hit to earnings and net worth of selling assets. It would be unfortunate for a credit union to take action based on net economic value analyses and have decision-makers and examiners be surprised by the hit to earnings and net worth.

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