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If You Think Changes in Payments Won’t Impact Your ALM and Interest Rate Risk Management―Think Again

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There are bites – small and LARGE – being taken out of credit unions’ non-interest income. Just consider:

  • PINless PIN.
  • Apple Pay – or the pay option du jour (e.g., Bitcoin, Samsung Pay, etc.).
  • The increase in payments via ACH, including P2P.
  • The decline in ODP.

As these bites are being taken out of revenue, decisions will need to be made as to how to compensate for the loss, not to mention the additional expenses associated with managing multiple payment options for your members.

If credit unions are not willing to accept lower earnings, then viable options are to:

  • Generate other non-interest income that is not influenced by interest rates.
  • Generate new interest income by accepting additional credit risk, interest rate risk, or both.
  • Be fanatical about continuous process improvement to better manage expenses.

Many high-functioning credit unions are proactively digging deep into their risks to non-interest income. They are quantifying the bites – small and LARGE – and forecasting trends to understand, well in advance, the potential impact to income. Identifying these risks, long before they become an unfortunate reality, opens up many viable options for risk management and mitigation.

Decision-makers of high-functioning credit unions are then investing the time to have strategic discussions. These forward-thinking discussions help decision-makers make rational, in-depth, strategic decisions versus having a knee-jerk reaction if the risks become reality. If it becomes necessary to take on additional credit risk or interest rate risk, then it can be done in a deliberate manner allowing decision-makers adequate time to test additional risks in small, manageable increments.

History has proven that the point at which you address a problem is directly related to the number of viable and desirable options you have to solve it. Don’t wait to address this issue.

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Proposed IRR Regulation Could Have Unintended Consequences

C. myers agrees with the objective that most institutions should have an effective interest rate risk (IRR) management policy supported by an effective IRR program.  However, we do not agree that it should be regulation.

Keep in mind as you read our comments that our business is to provide asset/liability management services to financial institutions.  We have worked with hundreds of credit unions providing long-term risks to earnings and net worth simulations, static and dynamic balance sheet analyses and net economic value (NEV) simulations.  A regulation of this nature would likely materially increase our business opportunities, yet we do not believe it is in the best, long-term interest of the industry.

One primary reason that we do not support the proposed regulation is that it is ambiguous.  We understand this ambiguity is necessary.  However, ambiguity will lead to subjectivity when implementing the regulation.  Whether a credit union has a written policy with adequate limits and an effective program addressing IRR may ultimately be determined by each credit union’s most recent examiner.

Please click here to read our full response to the proposed IRR regulation.