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|The Pulse | 07-17-2018|
Volume 7, Issue 28
MnCUN Urges Maximizing Your Membership, Highlights Mid-Year 2018 Activities & Accomplishments
Throughout the year, MnCUN is dedicated to accomplishing a wide variety of strategic initiatives geared toward creating an environment for credit unions to grow. These activities include: providing strong advocacy on the legislative, regulatory, and public awareness fronts; offering regulatory compliance support; supplying education and networking opportunities; and fostering cooperation and unity among the industry.
At the mid-point of 2018, we wanted to give you – our members – an update on the activities that the Network has engaged in on your behalf.
Products & Services
Awards & Recognition
The strength of the Minnesota credit union movement is represented by the partnership between the Network and our member credit unions, along with our dedication to working cooperatively to advocate for more than 1.7 million credit union members across the state. We appreciate the privilege of serving you and working with you to meet industry challenges and opportunities. Please feel free to contact Network staff at any time with your questions or suggestions.
CU Social Good added to Credit Union News Cycle
When credit unions share their news stories and press releases with MnCUN, we post them to the Minnesota Credit Union News Channel and share them through The Pulse newsletter. Now, MnCUN will also post these stories to CU Social Good, a microsite that captures credit union community impact stories. Through CU Social Good, MnCUN will also track volunteer hours, donations, and scholarships to demonstrate the tangible giveback of credit unions with legislators, regulators, and press.
Stories can be submitted to MnCUN Director of Communications Laura Whittet.
Whether we like it or not, there are some immutable truths in this fickle world of ours that simply can’t be denied; like water running downhill. Or, the way it always rains the day after you wash the car.
When it comes to the institution’s investment portfolio, the immutable truth we’re all living with these days is the inverse relationship between interest rates and bond prices. When interest rates rise, bond prices fall. Water runs downhill. Nobody likes it, but, some are better prepared for it than others.
With the Federal Reserve Bank having already instituted a handful of rate hikes and the prospect for a few more almost a certainty, portfolio managers are seeing the value of their holdings decline as, for some, the level of market value depreciation becomes uncomfortably high. For some, perhaps, but not necessarily for all. No one enjoys watching the value of their assets decline, but market risk is, and always has been, an element of portfolio management. Not even the most prudent and savvy of portfolio managers are immune from market risk and if your institution has a bond portfolio, it has exposure to market risk.
Why is it then, that declines in valuations are so often accompanied by consternation and hand-wringing? Institutions buy securities in order to have earning assets, and whether securities have an unrealized gain or an unrealized loss, they are still assets and they are still earning. Problems seem to arise for those portfolio managers who discover that somewhere along the way, they became speculators and are dismayed when they learn, often the hard way, that they somehow missed the top. Or, maybe they missed the bottom, or whatever it is they “knew” was going to happen. Perhaps blinded by shiny yields, their security selection process failed to identify undesirable characteristics, like cash flow volatility, that can accelerate price depreciation in the face of rising rates.
How much risk is too much?
Other portfolio managers, and boards of directors for that matter, seem a lot less stressed-out by rising rates and falling values. Does that mean they’re happy about their bonds being underwater? Probably not, but they also know it’s not the end of the world. They know that because, as part of their portfolio management process, they gave some thought to their portfolios’ role and along with that, their own appetite for risk. Are they all loaned-up and just need a liquidity buffer or a temporary parking place until loans are funded? Or, is loan demand weak and investments are required to be primary income generators? Does the institution have large volumes of public deposits that require certain types of securities for collateral? How well is the institution capitalized and what other Interest Rate Risk exposure is present? Is asset quality an issue?
The result of such introspection will hopefully help answer a key question: “How much risk is the right risk for my institution?” The answer is not the same for everyone. With the analytical tools available these days, portfolio managers can estimate with surprising accuracy, the price volatility of individual items or an entire portfolio. Having that ability doesn’t prevent price depreciation, but it does prevent it from being an unpleasant surprise, and that prevents a lot of hand-wringing.
The cash flow defense.
Once it is determined how much market risk can be comfortably tolerated, the security selection process actually becomes simpler. Potential alternatives can now be evaluated in the context of predetermined depreciation parameters. You’ve identified your pain threshold and can now apply your analytical techniques to measure what kind of exposure your various alternatives might bring with them. Those alternatives, whether they apply to broad strategic options or individual security selections, can now be judged on the basis of their contribution to, or mitigation of, depreciation risk.
For those who have taken the steps that allow them to be comfortable in their own risk, downturns in the market do not induce panic. Rather than lament the price depreciation wrought by higher market rates, portfolio managers know that their efforts to create and maintain a steady stream of stable cash flow will now be rewarded. This cash flow line-of-defense is beneficial in two ways. Its source represents a diminution, in the case of amortizing securities, of assets with below-market values. These funds now become the transactional ammunition with which to replace lower-yielding “underwater” assets with higher-yielding, current-market bonds. Depreciation is reduced and yield is increased.
These are both good things but won’t happen unless care is taken to identify and acquire along the way, the kinds of securities that will provide this valuable, defensive cash flow just when it is most needed. Remember what your parents told you; defense wins championships.
To learn more, view the Baker Group Investment Strategies Webinar.