Are Credit Unions Particularly Vulnerable To Interest Rate Shifts?
by. Henry Meier
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.
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