Credit Unions Ready for Interest Rate Rise: Trades
Credit union trade organizations have refuted claims made about interest rate risk in a Wall Street Journal report.
“Credit unions in search of higher returns are loosening lending standards and piling into longer-term assets, exposing the firms to potentially significant losses if interest rates rise and worrying regulators in the process,” said the article, published Thursday.
CUNA said credit union long-term asset exposure is manageable.
According to CUNA’s analysis, long-term assets at credit unions stand at 35% of total assets, which represents a five-percentage point increase compared to pre-recession levels.
"The aggregate $1.34 billion in unrealized losses on investments reported in the article is equal to only 1.2% of the total $117 billion in credit union net worth and to only 17% of first quarter annualized earnings, which were $8 billion. No strain to the federal insurance fund appears imminent," said CUNA President/CEO Bill Cheney Monday.
"Credit unions, right now, have an abundance of liquidity, with an average loan-to-share ratio of 69%, suggesting the pressure to sell any securities with unrealized losses is quite low. It also is worth noting that unrealized losses today are about equal to those seen in 2004,” he added.
NAFCU President/CEO Dan Berger said Monday the article inaccurately portrays the nation’s credit unions in a negative light.
“Credit unions are safe and sound institutions and have successfully weathered the recent financial crisis because of their prudent business model, and they have been widely lauded for it. An integral part of that business model is managing interest rate risk and strict adherence to regulatory requirements,” Berger said.
NCUA Board Chairman Debbie Matz told Wall Street Journal she is concerned the agency’s message about interest rate risk is either not getting through or credit unions are listening but choosing not to do anything about it.
In response, Berger said the NCUA should focus on providing credit unions with additional tools and resources, including increased investment authority, to help manage their interest rate risk. Berger said the agency should put less emphasis on the proposed risk-based capital rule, which NAFCU argues would harm the industry.
CU Times asked Mary Dunn, CUNA senior vice president and deputy general counsel, about the Wall Street Journal report during a Monday press call.
“The NCUA is doing its job of presenting the information it has. They’re entitled to go to the press just like we are, but we don’t agree with their analysis,” Dunn said.
CUNA Chief Economist Bill Hampel told CU Times the agency has been expressing concern for three years that credit unions are not sufficiently preparing themselves for the imminent rise of interest rates.
“The three years have passed and nothing has happened. Of course that means we’re three years closer to when interest rates rise. This is a judgment call and from what we hear from credit unions, the way this issue is being dealt with in examinations, suggests that the agency might be applying an overly simplistic approach to interest rate risk, the result of which is they may be overstating the effect,” Hampel said.
“I think NCUA believes that credit unions are not sufficiently adjusting for interest rate risk. From all our dealings with credit unions, we think they are. They’ve had asset liability management in place for a long time. We think credit unions are doing a fine job with it,” he also said.
Hampel said CUNA sent a letter to Wall Street Journal explaining its position on the issue.