DALLAS (9/28/09)--Rampant change is reason enough for credit unions to renew their interest in managing liquidity and interest rate risks, says Southwest Corporate. It lists five reasons a sound asset/liability management (ALM) process makes sense in today's economy:
* ALM is valuable for more than just compliance reasons. Credit unions historically use ALM to assess balance sheet risk, but many haven't incorporated overall risk exposure into their strategic decision-making. They need to begin evaluating the results of their risk analysis as it relates to the credit union's long-term strategies and goals so they can be adept at adjusting near-term decisions, said the corporate. Information gleaned from ALM reports enable credit unions to manage interest-rate risk, assists in strategic planning and budgeting, and helps credit unions respond to member deposit behaviors, said Mark DeBree, Southwest Corporate Investment Services' manager of ALM analysis, in an article on the corporate's website. * Credit union balance sheets are becoming more complex as mortgage portfolios grow. Credit unions are making fewer vehicle loans and more mortgage loans. In 2008, mortgage loans represented 38% of credit unions' total loan portfolio, a 6% increase from 2005. Vehicle loans for 2008 totaled 21%, or 4% less than in 2005. The growth in mortgages brings concerns about their longer average lives and durations, said DeBree. The average life of a vehicle loan is 2 1/2 years, he said. Mortgages also are more exposed to extension and contraction risk because of the embedded prepayment option. And hybrid mortgages have added complexity to the portfolio. * Regulators are pressuring financial institutions to understand and accurately measure interest-rate risk. The National Credit Union Administration has expanded the ALM portion of the exam and contends that credit unions familiar with their tools and the information those tools can provide are better prepared when adjustments are called for from economic events, said Southwest Corporate. * Uncertainty prevails in the market. Interest rates are near historically low levels and the inflation outlook isn't clear. Mortgage delinquencies and foreclosures are rising, and financial institutions are finding it difficult to operate profitably. DeBree noted that given the Federal Reserve's actions Wednesday--plus the addition of a second stimulus package and possible extension of homebuyers' assistance to all homebuyers, "it is not likely we are headed toward a recovery any time soon." Addressing risks embedded in credit union balance sheets is more critical than ever, said the corporate. * The potential for rising interest rates is high. An economy in recovery means interest rates likely will rise. With stimulus spending and restructuring of consumer and corporate balance sheets, the recovery will see rapidly increasing interest rates. "A quick rise in rates can be tough on financial institutions," said DeBree. "Upward pressure on cost of funds eats into the already narrow net interest margin that has resulted from the fixed-rate loans on the books at recent low rates."
For more detail, use the link to Southwest Corporate's website.