Regulators Issue Advisory on Managing Risks From Rising Interest Rates
"Institutions should ensure their scenarios are severe but plausible in light of the existing level of rates and the interest-rate cycle," said the advisory from the Federal Financial Institutions Examination Council.
The Federal Reserve has kept interest rates unchanged since the middle of last year, but several Fed officials have said higher rates could be forthcoming as the economy shows signs of improving.
"In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates," according to the council.
The council said institutions can mitigate their risk by altering its balance sheets. Other solutions include: raise additional capital, reduce levels of interest rate risk exposure and strengthen an institution's risk management expertise's 11-page report.
NAFCU Director of Compliance Anthony Demangone said the advisory "clearly means that regulators think interest rate risk is going to be a problem because interest rates are likely to only be going in one direction, up.''
He added that credit unions holding mortgages and other assets at lower interest rates could run into difficulties with their balance sheets as interest rates go up.
The Federal Reserve has kept has kept interest rates unchanged since December 2008.