SAN FRANCISCO-Interest rates are low and have been for many months, but the Federal Home Loan Bank here cautions CUs not to wait too long to plan for the inevitable climb.
Patricia Remch, senior vice president of sales and marketing at the Federal Home Loan Bank of San Francisco, told Credit Union Journal there is "no doubt" interest rates will rise again, and regulators have "made it clear" financial institutions must address that risk in their strategic-planning process.
"The problem is, how do you manage interest rate risk at a time like this?" she noted. "Deposits are plentiful, rates are at historic lows and have been there a long time, so why bother to pay extra to hedge now when there's no sign of rates going up?"
Remch said waiting until the market turns could be more expensive, since it is likely hedging costs will rise quickly once investors perceive that a rising interest rate environment is imminent.
"Credit unions looking to keep funding costs down but protect themselves from a sudden rise in interest rates may benefit from using capped borrowings," she advised.
"Under our Capped Adjustable Rate Credit advance, for example, credit unions receive funding at a variable rate that adjusts with LIBOR. If rates remain low, the credit union's funding remains low. If rates turn around and begin increasing, the credit union would be protected against any increase above its capped rate."
According to Remch, another option for CUs is to borrow long-term from their Federal Home Loan Bank, using fixed-rate advances to create a laddered portfolio with a range of maturities.
"Credit union members of the Federal Home Loan Bank of San Francisco can take advantage of our partial prepayment symmetry feature on these advances," she said. "If rates rise, but the credit union finds that it no longer needs the long-term funding, it may be able to recognize a gain when it prepays the advance."
