So why measure interest rate risk? One obvious reason is that the regulators require you to measure it. Even if that wasn't the case, you should still measure your interest rate risk - using both measures EAR and EVR. Why?
The main reason you should be concerned about interest rate risk is that it can affect your bottom line more than just about anything else you can do as a credit union manager. This latest plunge in rates should have driven that lesson home. Since most credit unions are exposed to falling interest rates, most credit unions have lost money (lots of money) as the Bank of Canada drove rates down to their lowest possible level.
Was this loss of income preventable? Yes - it was entirely preventable. Even further, protecting yourself from falling interest rates usually increases income. To protect yourself from falling interest rates, you normally seek longer investments and shorter deposits. Longer investments typically have higher rates and shorter deposits typically have lower rates - hence more profits. So, not only could you have prevented the latest drop in income, you could have benefited from even more profits. You could have had your cake and eaten it too. With hind sight, a clear no brainer. That is why you should measure and control interest rate risk.
Some credit unions were forced to freeze their prime rate to prevent a further erosion of income. That too was entirely preventable. Your borrowing members could have had the entire reduction in interest rates. Today, you could be offering new clients a 2.25% prime loan on their mortgages. Member satisfaction and new member attraction is another reason why you should measure and control interest rate risk.
It is all hindsight now. Consider it a lesson learned. Start seriously measuring and controlling interest rate risk.
While on the topic of lessons learned, here's another. You can't consistently predict interest rates (although some people pretend they can). I didn't see anyone calling for this recession and I didn't see anyone calling for the dramatic plunge in interest rates to record low levels. That's why we endorse the philosophy of getting immunized from interest rate risk - then you don't care which way rates go. Then you can simply manage your credit union without worrying (or caring) about what the Bank of Canada will do next.
Get control of your interest rate risk and you can concentrate on serving your members. There is no better reason than that.