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Stigma Against Secondary Borrowing Doesn't Have to Be

DALLAS - Some credit unions may view secondary borrowing as a "sign of weakness" but it can actually be utilized to help manage various risk elements-such as liquidity, earnings and interest rate risk. This, according to a new report "Secondary Term Borrowing: Myths and Justifications for Credit Unions," published by...

By Staff Writer | Updated on February 24, 2004

DALLAS – Some credit unions may view secondary borrowing as a “sign of weakness” but it can actually be utilized to help manage various risk elements-such as liquidity, earnings and interest rate risk. This, according to a new report “Secondary Term Borrowing: Myths and Justifications for Credit Unions,” published by Southwest Corporate Investment Services (SCIS). “The use of secondary borrowing can provide an effective funding and risk management tool necessary for prudent financial management without adversely affecting the credit union’s core operation,” said Brian Turner, senior advisor for SCIS. Turner said there are several reasons a credit union might consider secondary borrowing including as a low-cost source of liquidity; a structured liability to manage funding duration and long-tem net margins; a catalyst for offsetting adverse rate risk from core operations and a micro-hedge against long-term lending in a low rate environment. In the report, Turner said while “red flags” tend to go up when a credit union resorts to secondary borrowing, “the truth is term borrowing can be an effective tool.”

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