Are Credit Unions Particularly Vulnerable To Interest Rate Shifts?

July 1, 2013 at 8:05 am Leave a comment

Depending on which tea leaves you choose to read, the FED is either signaling that it is damming the torpedos and going full speed ahead with a gradual easing of its bond buying program, notwithstanding the recent gyrations of the financial markets, or anxiously seeking to reassure the markets that it is still committed to this program for the long term.  Either way, What the FED ultimately does will, of course, impact credit unions, as it will any financial institution.  But are credit unions uniquely vulnerable to a shift in policy?

Credit unions may be “particularly vulnerable” to a sudden spike in interest rates.  That’s the assessment of the influential Economist magazine.  The basic gist of the article is that while banks have bitterly complained that the Federal Reserve’s bond buying program has squeezed them by keeping interest rates artificially low, a policy shift away from buying bonds is, of course, not without risk.  The writer argues that smaller institutions across the globe don’t have the ability to quickly re-price their portfolio in response to interest rate shifts and “a similar area of vulnerability in America may be in credit unions, a type of financial cooperative, which have taken on interest rate risk through fixed rate lending funded by variable rate deposits.”

If this was simply the white noise of banker pablum, this passing comment wouldn’t be worth a second thought.  But the Economist is not written by reactionary lobbyists.  So, do these concerns have merit?  On the margins, yes.  Credit unions and community banks have less investment flexibility than larger financial institutions.  As a result, they have less flexibility to hedge against interest rate fluctuations.  This is why I believe that NCUA should continue to expand the investment options of credit unions.  Investments such as derivatives may be more than most credit unions need, but as they grow, they need more weapons in their arsenal.

But, beyond the general outlines, the Economist critique is an overgeneralization.  No one is joining a credit union because of aggressively overpriced incentives for account dividends.  In fact, given our lack of secondary capital, if the industry has any problem at all, it’s that it has more money than it knows what to do with.  Second, let’s not make it sound as if credit unions are powerless to respond to a changing interest rate environment.  Credit unions can sell mortgages to the secondary market, so we are not about to see a repeat of the S & L crisis of the 1980’s.  Credit unions can sell mortgages if their margins get squeezed.  Finally, let’s get real.  On balance, artificially low interest rates — and that’s exactly what we have as a result of the Fed’s bond buying program — ultimately hurt credit unions more than it helps them.  We need places to get a decent yield on our members’ money and in this environment, that’s almost impossible to find.

Entry filed under: Economy, General. Tags: , .

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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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