DALLAS-Credit unions must now pay attention to an increasingly volatile long end of the yield curve, as well as to the stability of core deposits.
That is the advice of Robert Perry, financial advisor for ALM First, who recommends that in what is likely a rising-rate environment, it's time to again perform risk analysis on assets, particularly longer-term, as well as on deposits to evaluate liquidity risk.
"The piece of the puzzle financial institutions really need to understand is the interaction between the liquidity and interest rate risk-how much of their core deposit funding is really short duration in nature," said Perry. "We are recommending institutions determine if they are losing the duration benefit of those deposits and also possibly losing the funding benefit of them."
Perry acknowledged what many have come to realize during the recession, that consumers have moved money out of mutual funds and into insured deposits, including checking accounts, and have stepped up balances to remain liquid.
"We think some of these funds will flow back into other alternatives, such as money market funds, as rates increase," said Perry. "We are recommending clients really analyze what the long-run balances will look like on their core deposits. It could be tough to compete with money funds putting out 2% to 2.5% yields. The risk is that what you thought was a longer-duration, stable source of funds becomes a short-duration unstable source of funds."
No Inflows Projected
ALM First does not foresee an inflow of deposits as rates advance upward. "Not unless a bank or credit union prices way above market," said Perry.
Perry reiterated that the imminent risk now is with assets at the longer end of the yield curve, saying the front end "will stay anchored for a while . . . You will see more volatility the longer out you go. There is pretty good consensus on where rates will be over the next six months, but there is a lot of uncertainty over where ten-year rates will be two years from now."
CU balance sheets, from what ALM First has observed with its clients, are prepared to deal with increasing interest rate risk. "The industry has done a pretty responsible job of keeping its arms around this," noted Perry. "Many of the longer-duration assets have been sold to the secondary market."
