C. Myblog

We Are Outside of Our A/LM Risk Limits. Should We Change Them?

June 12, 2014

There is tremendous pressure on earnings from increasing costs due to regulations, compliance, technology and delivery channels to name a few. Margins are also tighter than in the past. To help compensate for reduced profitability, credit unions often take on more risk, such as interest rate risk and credit risk, to protect current earnings. However, this can lead to the credit union being outside of the risk limits they have outlined in policy. When this happens, the question, “Should we change our A/LM risk limits?” frequently gets asked.

Before you decide to change your risk limits and simply accept more risk, it is important to have a healthy debate and discussion focused on what the true line in the sand should be and to make sure that stakeholders fully understand the consequences. Many credit unions have found it valuable to place themselves in a scenario where rates have increased to their risk limit scenario to understand, ahead of time, the viable options they may have to unwind their risk. For some, this exercise has been very comforting – in other words, they have many viable options. Others have discovered that the options they thought they had were not enough to mitigate the additional risk in a timely fashion. Those credit unions may choose not to increase risk and address earnings issues from a different angle.

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