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.
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