By Ray Birch
SCOTTSDALE, Ariz.—One ALM expert is encouraging credit unions to gain a sound understanding of long-term member deposit behavior to gauge their sensitivity to rate movement.
Bill McGuire, MPS
That will help tweak ALM models to reflect what could occur when rates are expected to rise in 2015, explained Bill McGuire, chairman emeritus at McGuire Perfomance Solutions, a Mountain View Company.
“Understand how sensitive your members are to repricing or not repricing--take time to understand that now,” said McGuire. “Learn what happened in 2004-2007, the last time rates rose.”
McGuire noted that CUs should not expect the exact same behavior when rates rise in the near future, but at least they have a benchmark to follow.
With rebuilding capital still on the minds of credit unions—and certainly NCUA’s—McGuire said that credit unions need to practice “repricing discipline. If you want to build margin and create capital, you will have to have the courage not to raise rates on certain accounts that allow the CU to hold rates steady. That means share accounts and share drafts—and boards will be sensitive to this.”
McGuire acknowledged that repricing discipline may be difficult to explain to the board, which is always looking for ways to give back to the membership.
“Help the board understand why this is important, maybe run your earnings at risk IRR profile, with different repricing. Do some sensitivity testing around your core deposit repricing. Explain to the board that you love members too and want to give them the best deal, but if you raise share rates as soon as interest rates move up you are cutting earnings—which is taking money out of the pockets of members as well.”
McGuire advised that credit unions continue to attract more share draft money, particularly business checking, to add deposits that will “insulate the credit union from rising rates.”
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