What should credit unions do about interest rate risk?

For the last 10 years, credit unions have dutifully modeled, monitored and made decisions to keep interest rate risk under control. And interest rates didn’t move.

Looking back as far as the early 1970s, rates have never held steady for this long before, but they’re moving now. Combine that reality with the fact that many people in management were not in decision-making positions the last time interest rates rose, and this a new experience for many.

Despite the Fed’s decision to keep rates the same during its May 2018 meeting, there is still broad agreement in the market that rates will continue to rise. The question is, What should be done?

First, don’t panic. Interest rate risk isn’t bad; it’s simply a part of doing business as a financial institution. It’s part of the continuous balancing act between yield today and risk tomorrow. And it’s a lot like credit risk—while you may wish for no loan losses, you’ve consciously taken on the risk in exchange for higher yields and accept that some losses will occur.

 

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