WesCorp can now offer CUs access to derivatives market to help hedge interest rate risk

SAN DIMAS, Calif. - WesCorp has become the first corporate credit union in the nation to be granted derivatives vendor status from NCUA. WesCorp can now implement a derivative hedging program as allowed under Part 703 of NCUA's Rules and Regulations. The new authority is significant because it can help credit unions manage potential interest rate risk. Interest rate risk has become more of a focus for NCUA because of the growth of mortgage loans in credit union portfolios. NCUA issued a Letter to Credit Unions (99-12) last year that addressed the issue of credit unions managing the potential risks of increased mortgages in their portfolios. "I think the thing NCUA is most focused on is the growth in long-term fixed-rate residential mortgage loans on credit unions' balance sheets. To the extent that you're starting to book long-term fixed-rate assets that are funded by short-term liabilities, you are also building up your interest rate risk," said Bob Burrell, senior vice president and chief investment officer for WesCorp. Aside from the growth of mortgage loans in credit unions' portfolios the extended maturities on car loans can also increase interest-rate sensitivity. On the liability side of the balance sheet growth in money market accounts and certificates can also present some interest rate risk for credit unions. Of course interest rate risk from commercial mortgage lending led to a government bail out of thrifts in the `80s. Burrell said credit unions are nowhere near that situation because of their strong capital levels and relatively low interest rate risk. "But now is the time to start looking at managing interest-rate risk, not when you have a problem," he said. Hedging interest rate risk may become important this year given the anticipated increases in rates. The Fed has already bumped up rates 25 basis points, and many Wall Street analysts expect more increases are on the way. Burrell said he expects the Fed to raise rates again at their March meeting, the only debate is whether it will be a 25 or 50 basis points increase. "WesCorp's own forecast is that we probably are within 25 to 50 basis points of the peak of interest rates, and that will happen sometime in 2000," said Burrell. "If you look back, rates have already risen 150 basis points from a year and a half ago. It would've been nice if this program had been around then," said Burrell. Derivatives can help credit unions become less interest-rate sensitive and continue to meet their members' loan needs. Instead of having to borrow money to reduce the interest-rate risk of their portfolio, they can use derivatives to do interest-rate swapping by converting fixed-rate loans into floating-rate loans to try and offset potential interest-risk. "They don't have to turn business away because they don't want to take on any more interest-rate risk. I think that's the big advantage here, that hedging becomes a natural part of the business process, whether credit unions think rates are going up or down. It takes credit unions away from trying to guess where rates are going all the time." It's common for banks to use the derivative market to manage balance sheet risk, but credit unions for the most part haven't. Federal credit unions can use derivatives to hedge their balance sheet under 703, however it's such a time-consuming and intricate process to get that authority from NCUA that only two federal credit unions have done it so far. WesCorp's program gives CUs a fast-track to the derivatives market. With WesCorp's new authority, a credit union would have to get one-time approval from NCUA and meet basic WesCorp program requirements, but from there would not need any further NCUA approvals to utilize WesCorp's derivatives program. -pgentile@cutimes.com