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CU System
Catalyst analyst Guard against concentration risk
FARMERS BRANCH, Texas (1/30/12)--The Federal Reserve's statement last week that it will keep interest rates at near-zero levels through 2014 could cause concentration risk, which could have consequences for credit unions, an industry expert warns.

Concentration risk is the overall spread of a financial institution's outstanding accounts over the number or variety of debtors to whom the institution has lent money.

The Fed's statement appears to be a "polite way of saying, 'If you liked 2011, you're going to love 2012'," Brian Turner, director and chief strategist with Catalyst Strategic Solutions, told the Texas Credit Union League (LoneStar Leaguer Jan. 27).

Catalyst Strategic Solutions is merger of the former Southwest Corporate Investment Services credit union service organization and Georgia Corporate's asset/liability management service.

The Fed has been able to create a no-growth, low-inflation environment, which softens the impact on the consumer, he added. However, it had to inject too much money into the system to achieve that goal. "This could cause interest rates to skyrocket when true economic growth kicks into gear," Turner said.

For credit unions, the timeframe during which growth leads to increased loan demand could be short-lived, Turner said.  This would be followed by another round of falling interest rates.

"Institutions should stick to the proper balance sheet allocation to manage against concentration risk, maintain a stable liquidity profile by not seeking long-term assets to invest and proactively position their interest-rate profiles within certain risk-tolerance limits that still permit stable short-term earnings," Turner concluded.


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