CFO Focus: Maintaining profitability in a zero-bound rate environment

The first step is reviewing the impact of this real-life rate shock on your balance sheet.

Over the past few weeks, the COVID-19 pandemic has brought global and local economies to a screeching halt. In March, the Federal Reserve lowered short-term interest rates by a total of 150 basis points to a target range of 0 to 0.25% through two emergency rate cuts. This unprecedented move is intended to loosen the cost of borrowing and infuse the markets with liquidity. However, it was not effective in easing market concerns and has exasperated the task ahead for financial institutions already dealing with an operational crisis. Credit unions must now adjust their balance sheets to maintain profitability in a zero-bound rate environment.

Credit union leaders must focus on the strategic levers they have available to drive profitability: operational, funding, liquidity, credit, interest rate risk and leverage.

The first step for credit unions is to review the potential impacts of this zero-bound rate environment on their balance sheets. While most asset/liability management models do not have a down 1.5% rate-shock scenario, looking at the down 1% and down 2% scenarios will provide a close approximation. We encourage credit union executives to give special consideration to projected profitability as well as the potential impact on capital. Before the rapid development of this current health and economic crisis, most credit unions only budgeted for one rate cut this year. Credit unions will see pressure on net income in 2020, so we advise credit union executives review their budgets and forecasts for the remainder of the year.

 

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