Interest Rate Risk at MCCU
Sue Smith was a board member of Midwestern Community Credit Union (MCCU) in 2013, when short-term interest rates were near zero due to an easy Federal Reserve monetary policy following the 2007-2009 recession. Smith remembered the S&L crisis of the early 1980s, when many S&Ls failed due to an interest rate mismatch of holding long-term fixed-rate mortgages as their main asset, while funding them by short-term savings deposits. As interest rates increased, some S&Ls were paying more on deposits than earnings from mortgage loans, and a large number of S&Ls went out of business. MCCU hired a new vendor and the vendor proposed a complicated asset-liability model that included interest rate risk. Smith was surprised the model predicted MCCU might benefit in an increasing interest rate environment. She decided to analyze the accuracy of the vendor’s model from several perspectives in order to make board policy recommendations.