Wall Street Journal
story published Friday regarding credit union interest rate and credit risk misses some important points, according to Credit Union National Association analysis of credit union financials.
item, "Credit Unions Ramp Up Risk," makes a claim that credit unions are piling up long-term assets, thus exposing themselves to "potentially significant losses if interest rates rise" and worrying regulators in the process. The
story also says that "a similar increase in long-term assets" is playing out at smaller banks.
CUNA analysis shows that credit union long-term asset exposure is manageable: Long-term assets stand at 35% of total assets--a five percentage point increase compared to pre-recession levels, but a reasonable exposure given that it is dwarfed by the 51% of assets in net worth and core deposits (regular savings and share drafts).
CUNA President/CEO Bill Cheney notes that in the specific case of the unrealized losses that the National Credit Union Administration reports in the article, CUNA finds those to be modest in the context of total capital and earnings at credit unions.
"The aggregate $1.34 billion in unrealized losses on investments reported in the article is equal to only 1.2% of the total $117 billion in credit union net worth and to only 17% of first quarter annualized earnings, which were $8 billion. No strain to the federal insurance fund appears imminent," Cheney notes.
The CUNA leader goes on to explain that even a significant increase in market interest rates would not necessarily cause unrealized losses to become realized losses. "Credit unions, right now, have an abundance of liquidity, with an average loan-to-share ratio of 69%, suggesting the pressure to sell any securities with unrealized losses is quite low. It also is worth noting that unrealized losses today are about equal to those seen in 2004."
Further, as CUNA said last week in its comment letter to NCUA on its risk-based capital proposal, credit unions have been in this situation before and have come out well. Beginning in June of 2004 the Federal Reserve Board began to raise short-term interest rates, and by July 2006 the federal funds interest rate had increased by roughly 425 basis points, to a monthly average of 5.24%.
Yet, Cheney remarks, despite this substantial market interest rate shock, CUNA is unable to identify--either through material loss reports (MLRs) or by other means--any strain on the National Credit Union Share Insurance Fund (NCUSIF) caused by natural-person credit union exposure to interest rate risk.
"The NCUSIF ratio actually increased over the period from $1.27 per $100 in insured shares at the start of 2004 to $1.31 per $100 at year-end 2006. Similarly, we are unable to identify any natural person credit union with more than $50 million in assets that failed as a result of too-high exposure to interest rate risk," says the CUNA CEO.
"Our analysis acknowledges the likelihood that some credit unions experienced reduced net interest income as a result of the rise in interest rates. Significantly, however, there is no evidence that this caused losses to the NCUSIF. In fact, the total of $20 million in insurance losses in the three years from 2004 to 2006, following the dramatic increase in interest rates, is less than half the $50 million in losses in the two previous years."
Cheney underscores that the CUNA analysis does not imply that credit unions shouldn't manage interest rate risk. "They must. It's simply to say that credit unions have a strong track record of strong interest rate risk management."
The Journal article also quotes unnamed analysts suggesting that credit unions are at the same time taking on additional credit risk by lowering underwriting standards. However, CUNA analysis finds no evidence of this and in fact shows that credit union loan loss rates have recently returned to pre-recession levels.
"The simple fact is that credit union lending has always been safer than any other group of lenders, and there is no reason to believe this has recently changed," Cheney emphasizes.
Cheney said CUNA is sending a letter to the
editors today "correcting the false and misleading aspect of their story."