Active Mitigation Strategies

Active mitigation strategies are typically necessary when a credit union has experienced a significant change in its portfolio holdings, and it determines that it has an unsafe level of IRR exposure as a result. A credit union in this position should consider the sources of its risk exposure, the time it would realistically need to reduce or unwind unfavorable risk positions, and management’s willingness to recognize losses to restructure its risk profile.

Each credit union has its own individual risk profile, tolerance for risk exposure, and policy limits. A credit union’s respective risk tolerance notwithstanding, if NEV measurements are low, declining, or even negative, or if income simulations indicate unsafe reductions in earnings, management should be prepared to take the necessary steps to bring risk within acceptable levels promptly. A lack of action by credit union management when unsafe exposure to IRR is evident may indicate a failure in risk governance.

Active strategies to restructure the balance sheet could include the sale of assets that are primarily contributing most to IRR (longer duration assets), reinvesting the proceeds in shorter duration loans and investments (including variable-rate products), and lengthening liability durations (such as term borrowings, CD programs, or interest rate derivative hedging). This strategy may include product pricing that incentivizes member movement to the desired product.

Credit unions with the appropriate expertise can use interest rate derivative instruments. Generally, credit unions will use derivative instruments as a hedge to mitigate IRR and help protect earnings and net worth under potential interest rate changes.

Last updated on December 06, 2024