Credit Risk

IRR and credit risk can be closely correlated. Ignoring the impact of potential IRR on delinquency can lead to a severe underestimation of overall risk. For example, a rise in interest rates can exacerbate defaults, such as in adjustable-rate products, resulting in a decrease in NII.

Given time, a credit union with sufficient capital and liquidity can recover from the adverse effects that a rise in rates can have on credit performance. In most cases, the net interest margin will recover as asset rates reset upwards to market. However, credit unions should understand that rapidly rising market rates can exacerbate credit risk exposures. This should be considered when assessing how market risks threaten earnings and net worth in the overall risk management process. Therefore, it is important to assess the type of adjustable-rate loan products, as well as their potential to expose a credit union’s balance sheet to concentration risk.

Last updated on December 06, 2024