OVERLAND PARK, Kan.-Credit unions are known for being cautious, but Tony Ferris said they need to realize that trying to avoid any interest rate risk can lead to trouble of a different sort. Ferris, managing partner for Rochdale Group, said 2014 strategic planning must take into account the total risk a credit union has as an entity, including strategic, credit, interest rate, operational and earnings. "If credit unions simply back off of interest rate risk, they are adding earnings risk," he explained. "They have to be thoughtful of, if we back off of interest rate risk, where will we make money?"
In the current rate environment-which has seen historically low interest rates for many months and now they finally appear to be rising-Ferris said CUs are trapped in a "difficult situation." To obtain any kind of earnings, they have to take some risks.
"If they understand the gamut of risk they are taking, for example more credit risk than interest rate risk, they can balance," he said. "For strategic planning purposes, they need to be able to measure risk and have a sales pipeline to drive consumer loans."
While many CUs dislike stress testing, Ferris said managers should embrace this part of the planning process because it leads to understanding the credit union's total risk position. He said it is vital to know what is the worst downside and is the CU able to cope if the scenario comes to fruition.
