Low Rate Policy to Raise Credit Union Margins

Tina Ramos-Ingold
March 25, 2010 | COMMENTS

The bottom lines of some California credit unions could benefit handsomely in 2010 because of the Federal Reserve's low-interest rate policy, according to two experts.

With the federal funds rate staying steady following the recent meeting by the Federal Open Market Committee, net interest margins at California credit unions stand to rise because of the current yield-curve spread, said Daniel Penrod, senior industry analyst with the California Credit Union League.

“Low savings rates, coupled with moderate loan rates, provide a good cushion,” Penrod said. “The current rate environment provides a great opportunity for credit unions to make a decent margin.”

Steve Rick, senior economist for the Credit Union National Association, agrees. He stated in a news release that the higher margins should help credit unions cover loan charge-offs.

The federal funds rate — the rate financial institutions use to make overnight loans to each other — is used as a short-term benchmark for many business and consumer loans. It's remained between zero and one-quarter percent since the economy plunged deeper into recession.

An FOMC statement notes that "economic activity has continued to strengthen” and “the labor market is stabilizing,” according to the CUNA statement. It says household spending was stronger, although "constrained by high unemployment, modest income growth, lower housing wealth and tight credit," and noted an increase in business spending. However, housing remained weak.

"While bank lending continues to contract, financial market conditions remain supportive of economic growth,” it said. “Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.”

The only dissenter to keeping the federal funds rate so low was Thomas Hoenig, who for the second consecutive meeting maintained that the exceptionally low rate for an extended period was no longer warranted. It could lead to a buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability, he said.

Reprinted with permission from the Texas Credit Union League.