Published in: CU Business 

It’s no secret to anyone in banking: rates are higher, and the curve is flatter. With the market expecting one more rate hike in December, it is important to look at current credit union financial conditions and hedging strategies with today’s rate environment in mind.

Higher Net Interest Margins

U.S. credit unions and the overall banking system have performed remarkably well during the most recent monetary tightening cycle. Since 2015, the U.S. Federal Reserve has hiked the Fed Funds Rate a total of eight times, increasing it from 0.25% to 2.25%. During the same timeframe, credit union net interest margins (NIMs) have been generally higher, increasing from 3.23% in Quarter 2, 2015 to 3.51% in Quarter 2, 2018.

Of course, a hefty chunk of the increase could be attributable to strong loan demand. The industry’s loan-to-share ratio now sits just under 83%, relative to 75% in mid-2015. A higher allocation to loans is correlated with higher NIMs, since loans tend to yield more than either cash or NCUA-permissible investments.

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