On the Cheesecake Factory and Interest Rate Risk

April 17, 2013 at 7:39 am 1 comment

imagesI love a good piece of cheesecake as much as the next guy, but I don’t often order it when I go out to dinner because to me it can be as delicious as mother’s milk to an infant or as dry and tasteless as stale toast in the desert.  (Last night, incidentally, I had a delicious piece of cheesecake).

What does this have to do with anything, you ask?  Because the Cheesecake Factory has grown in popularity because of its freakish ability to mass produce high-quality restaurant cuisine.  In other words, they’ve taken the McDonald’s model up a notch.  But if you only order your cheesecake when you go to the Cheesecake Factory, then banking is not for you.  In reality, banking is a business where some of the most important intangibles determining how much money an institution is going to be able to generate can never be predicted with certainty.  The key to being a successful credit union manager is to recognize where a risk is appropriate, to hedge your bets as much as possible, and ultimately understand what it is you’re getting yourself into.  Conversely, the key to being a successful regulator is to recognize that some risks are inevitable and to ensure that credit unions have the processes, policies and procedures in place so that they can reach their own conclusions after asking the right questions.

This is obvious stuff to many veterans of the industry, but we’re in the middle of an economic malaise that has made managing the inherent risk of trying to make money off other people’s money trickier than it has been for about thirty years.  For instance, the Credit Union Times is reporting this morning that interest in CDs continues to lag, which isn’t surprising considering that people can generate almost as much savings by placing their money under the mattress and keeping it on hand for when there’s actually a decent place to invest it.  In practical terms, this means that regulators and credit unions are headed for more tensions, not fewer.  I understand why regulators have to be concerned about the inherent dangers of concentration risk, for example.  But credit union managers have to also be concerned about generating income.

One area that is most likely to increase tension is in how you answer the following question:  is a sudden spike in interest rates likely anytime soon?  We could all come up with scenarios where the answer is yes, but the more likely scenario is that an economy that continues to slowly work its way out of a debt-driven recession doesn’t necessitate the type of FED induced interest rate shocks engineered by Paul Volcker in the early 1980s.  Not to mention that America is much more dependent on the world economy than it was thirty years ago and with China’s economic growth slowing and Europe mired in a recession, the odds of an interest rate shock seem to be as likely as Tiger Woods admitting he cheated at the Masters’ last week.

In the meantime, NCUA has not yet finalized regulations permitting credit unions limited use of derivatives as a hedge against mortgage concentration.  For many credit unions, expanded authority in this area would do more to help guard against the risk of a sudden spike in interest rates than the current guidance on interest rate risk ever will.

Entry filed under: Compliance, Regulatory. Tags: , .

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1 Comment Add your own

  • 1. Anonymous  |  April 17, 2013 at 3:11 pm

    Thanks, next time I’ll try it


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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