On the Cheesecake Factory and Interest Rate Risk
by. Henry Meier
I 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.
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