The Asset Extension Dilemma
Credit Unions | Deposits | NEV Supervisory Test
Margin pressure remains one of the industry’s biggest challenges today. The good news is higher rates and a steeper yield curve present opportunity not seen in a long time. The bond market is at a crossroads as long-term yields have entered a bear market amid mounting inflation expectations, while the front end of the curve remains near zero and may stay low for some time. Yet, in working as an independent strategic partner with many credit unions, we often find there is a stigma associated with fixed-rate assets. That stigma is related to traditional ways of looking at interest rate risk.
Herein lies the Asset Extension Dilemma. Should we extend assets today to grow net interest income and protect margins in this low rate environment?
If we do, how does it impact my risk position, and does my balance sheet support extension? If we do not, what gets in the way?
Below are six common impediments that disable asset extension which may increase risk and reduce earnings.