NCUA Report - November 2011

OFFICE OF EXAMINATION AND INSURANCE REPORT (FROM PAGE 1)

That said, at some point the economy will improve, thereby putting upward pressure on interest rates. Having sound infrastructure in place to measure interest-rate risk will help credit unions anticipate coming pressure on margins and manage such risk successfully.

In response to the second question, credit unions have significantly more exposure now to residential real estate—the key source of interest-rate risk in the industry—than they did in recent decades. In the mid 1990s, for example, residential mortgages accounted for roughly 19 percent of credit union assets, compared with 24 percent of peer bank/thrift assets. Between 2000 and 2004, home loans averaged 26.9 percent of credit union assets and 22.6 percent of peer bank/thrift assets. Since 2007, credit unions have held on average 32.8 percent of their assets in mortgages, compared with 22.0 percent for peer banks/thrifts. Put simply, while peer institutions have retreated from booking mortgages, credit unions have taken on more interest-rate risk.

Also in response to the second question, historically low interest rates imply at least the potential for larger increases than were seen in the past. At its lowest point in the 1990s, the one-year Treasury yield was 243 basis points below the average for the Great Moderation of 1982–2007. At its lowest point between 2000 and 2007, the one-year yield was 460 basis points below the 1982–2007 average. The September one-year yield—10 basis points—is the lowest of the post-World War II era and 551 basis points below the Great Moderation average.

In sum, the recent dip in rates provides no guarantee that what goes down will not ultimately go up. And history suggests that “up” could be significant. Moreover, past successes in working through rising rates offer no guarantees of success this time, given the large increase in mortgage lending by credit unions in recent years. Perhaps the best way to view the recent rate decline is as a window of opportunity to ramp up interest-rate-risk management to needed levels before interest rates inevitably rise.