NCUA vs. Credit Unions: How Much Is Too Much IRR?
When interest rates rise – and they will eventually, just as surely as spring will come – will credit unions be prepared to alter their portfolios and minimize interest rate risk?
And will regulators know a sound strategy when it smacks them in the face?
That’s also the question over which credit unions often come to loggerheads with NCUA examiners.
Balancing safety and soundness with the need for profitability has rarely been more challenging then it was over the past few years. Neither aspect can be sacrificed in pursuit of the other, and both credit unions and their regulators have valid concerns in trying to reach their goals, according to Brian Turner, chief strategist for Catalyst Strategic Solutions, part of Catalyst Corporate Federal Credit Union in Plano, Texas.
“Most regulatory guidelines are not obstructive and are reasonable in their intent, but there needs to be a more balanced approach in assessing risk exposure,” said Turner. “If you were to ask most credit union managers, they’d say the challenge is dealing with the unbalanced interpretation and intervention by certain field examiners.”
Despite some examiners’ concerns to the contrary, however, credit unions are in a better position than banks and other for-profit financial institutions, because the average life of their earning assets are shorter than those of the competition.
Even the growth of mortgage lending hasn’t significantly lengthened asset life, which across the industry remains between two and three years, according to Turner.
Read more: Interest Rate Risk Goes Beyond Mortgages
“Roughly 58% of credit union assets are in cash, short-term investments and vehicle loans,” Turner said. “The shorter asset duration creates less of an impact on cash flows from changes in interest rates. Therefore, income streams are not as adversely affected in a rising-rate environment as they are in the for-profit sector.”
And how much of credit unions’ aggregate industry asset portfolio does NCUA consider at risk?
Citing the wide range of specifics involved in determining risk, John Worth, chief economist for NCUA, declined to disclose a specific number.
“When you look at a credit union, interest rate risk and asset liability management risk are determined by a lot of variables,” Worth said. “It’s done on a case-by-case basis and is not something we have in a way that works well in the public space.”
Read more about interest rate risk and credit unions in the Feb. 5 issue of Credit Union Times.