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NCUA: Reaching for yield strategy may be problematic for credit unions in long-term

resized_NCUA_SEALA video analysis released by the National Credit Union Administration on Friday indicated that a change in interest rates will present challenges to the credit union industry, which has shown a dramatic reach for yield.

NCUA Chief Economist John Worth noted falling unemployment and improvements in consumer indices, which he said will likely help to increase membership, drive loan demand and improve loan quality.

He said, however, that credit unions should remain vigilant on interest rate risk, citing an 11 percent decline in investments with a maturity of less than three years and a 33 percent increase in investments with maturities greater than three years.

Worth said the strategy could boost earnings but may be problematic for credit unions later in the interest rate cycle.

“Continuing to increase the maturity of loans and investments at fixed rates in the next few months could leave credit unions vulnerable to rising short-term rates later on,” Worth said.

He said that as the Federal Reserve reduces its asset purchases in the coming year, long-term interest rates will likely rise, but because unemployment is “relatively high,” short-term rates will likely remain low over the next year.

“So the interest rate term spreads will likely stay wide or widen, but the widening spread is likely to be temporary,” he said. “Once short-term rates begin rising, they are likely to rise faster than long-term rates… So challenges looming on the horizon will be exacerbated for credit unions that reach for yield by lengthening maturities dramatically now.”

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