Fortress Balance Sheet

Build strength one stone at a time, starting with three related to interest rate risk.

by Greg Gibson, CPA

As credit union managers today, we see threats around every corner. And guess what, we’re right! But our jobs require us to manage around and through these threats successfully. Effectively doing so requires us to continually strengthen our balance sheets against threats known or unexpected, straightforward or complex, likely or even unlikely but highly impactful if they were to occur. The end goal of this effort is the development of a “fortress balance sheet” that can withstand assault by a variety of threats.

Over some threats we have little or no control. But over the vast majority we have the ability to mitigate the risks they pose. However to mitigate the risks already embedded in our balance sheets, we must, by definition, change something. And that something is often us and the habits and tendencies we have developed. Studied, prudent changes in our business model require a lot of homework as well as the courage and confidence to lead our organizations into areas that may be unfamiliar. But the reward can be substantially strengthening our organizations and their long-term sustainability.

Like constructing a physical fortress, the most expeditious path to buttressing our balance sheets is identifying our weakest points and then developing plans to strengthen them one stone at a time. A good place to start is by addressing interest rate risk. This is a risk that’s keeping many CFOs awake at night. And with good reason, as this threat has been growing over the past several years due to historically low rates that have prompted many financial institutions to originate and retain long, fixed-rate mortgages.

Now, as the inevitable rise in interest rates seems upon us, the challenge we face is how to alter what we have been doing for the past several years and strengthen our balance sheet against this threat. The obvious catch is how to do this in the current environment without completely devastating our income statement. So here are three “stones” to get you started considering how to strengthen your walls.

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