A Direct Line Blog

By Ian Trebilcock & the AIM Solutions Team

As we emerge from a period of high interest rates, now is a great opportunity to strengthen how interest rate risk (IRR) is managed. While competitive pressures continue to influence profitability, proactive planning can help you remain resilient. By regularly assessing balance sheets and refining risk management strategies, you can position your credit union to adapt smoothly to shifting rate environments.

Effective IRR management is established through strong measurement and monitoring. Asset and Liability Management (ALM) modeling can identify vulnerabilities in the balance sheet, such as mismatches in the maturity or repricing of assets. This can impact income and capital if rates move quickly in either direction. Net interest income (NII) and net economic value (NEV) simulations can help measure your exposure to changes in interest rates.

Regulatory guidance recommends periodic stress tests and the establishment of policy limits (e.g., maximum allowable changes in net interest income or asset values after a rate shock) to ensure that you maintain acceptable levels of risk exposure. In the current rate environment, balancing the down shock results in the NII simulation with the up shock in the NEV simulation is important.

To mitigate IRR, credit unions may:

• Adjust the mix of assets and liabilities (e.g., shortening asset durations or lengthening liability maturities)
• Increase capital buffers to absorb potential losses
• Maintain a consistent investment ladder
• In a falling rate environment, lock in duration and yield before rates begin to fall
• In a rising rate environment, shorten the asset side to reprice as rates rise

In a highly competitive environment, ongoing evaluation and adaptation of IRR policy and mitigation are vital to protecting net interest margins and ensuring long-term profitability.

AIM Solutions is a division of Millennium Corporate Credit Union. If you have questions regarding your credit union IRR risk or would be interested in financial modeling services, please feel free to contact us at AIM@millenniumcorporate.org or reach out at 1-800-721-2677.