In November 2008, the Federal Reserve lowered the Fed funds target to zero. More than six years later, perhaps the two most common phrases in ALCO meetings have likely been, “when the Fed raises rates…” followed by multiple variations of “… all (heck) will break loose.”
Though historical evidence does not support doom and gloom prognostications, the widespread anticipation of disaster combines with the focus of credit union regulation (managing interest rate risk-IRR), and results in ALCOs adopting overly conservative strategies that have caused their institutions to forgo significant income opportunities.
Given the downward trend in earnings, credit unions and regulators should revisit the realities (and focus) of IRR modeling and the resulting balance sheet strategies.
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