Interest-Rate Risk: What Goes Down Must Come Up?

July 23, 2010
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If history is any guide, interest rates eventually will follow a kind of reverse Newtonian logic: What goes down must come up.

In the meantime, credit union management and boards are keeping two questions uppermost in their minds:

  • When and how quickly will they turn around?
  • What should we do now to prepare for the upturn?

A number of articles and advisories over the last several years have addressed the potential problems rising interest rates might pose, particularly in terms of mortgage exposure.

In September 2003, the National Credit Union Administration (NCUA) released its Letter to Credit Unions 03-CU-151, cautioning credit unions about significant mortgage exposure. A January 2010 advisory, published by a consortium of financial regulators, reaffirmed the caution.

The advisory implored all financial institutions, including credit unions, to ensure that their interest rate risk management process is adequate for the level of interest rate risk on the balance sheet.

While credit unions have been hearing about potential problems associated with rising interest rates, interest rates currently remain at historically low levels. But they’re expected to rise at some point in the future.

So the question all should ask is, “Is our balance sheet well-positioned if interest rates were to begin rising tomorrow?”

Being prepared is ultimately what NCUA regulators have been trying to drive home to credit unions for several years.

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