Annual net income at credit unions declined 3.8% in 2013 to $8.14 billion from the previous year, according to the Financial Stability Oversight Council's annual report released Wednesday.
"A key concern for the industry is ongoing challenges related to the low interest rate environment and the eventual transition process to a higher rate environment, potentially with a flatter yield curve," the report said.
According to the report, although interest rate sensitive deposits have continued to decline as a share of total liabilities, they remain well above pre-crisis levels. The share of money market accounts and individual retirement accounts has continued to increase.
The report also said investments in total have increased, rising from 19% of assets in the fourth quarter of 2006 to more than 28% in the second quarter of 2013.
"Total investments as a share of assets declined somewhat during the second half of 2013 to just under 27%," the report said.
The council highlighted the NCUA's final stress test rule in the report as an example of the progress financial institutions are making on robust capital and liquidity planning.
"The Federal Reserve continues to conduct its supervisory stress tests to ensure that the largest U.S. BHCs have sufficient capital and rigorous forward-looking capital planning processes to enable banking firms to continue operations throughout periods of severe stress," the report said. "(The) NCUA recently finalized a stress testing and capital planning requirement for credit unions over $10 billion in assets."
NCUA Board Chairman Debbie Matz, one of 10 voting members on the council, urged credit unions to read through the report because financial stability and economic growth are critical to a successful industry.
"FSOC is an unheralded success story. Working together on projects like the annual report has strengthened ties between FSOC member agencies and organizations, increased collaboration, and created new and beneficial lines of communication and important venues to discuss views on new and emerging risks," said Matz.
"The report writing process is a valuable exercise for me and for NCUA in our role as supervisor and insurer of the credit union system. It is important for us to be continually reconsidering and evaluating risks to the credit union system," she added.
In response to the report's findings, Matz said operational risks, including cyber-security risks, remain an emerging and rapidly changing threat.
"Credit unions are not immune to this threat, and this will be an area of continued emphasis and guidance," she said.
Matz addressed the council's focus on the risk of increased interest rate volatility.
"Over the last several years, many credit unions increased their exposure to fixed rate real estate and more recently have dramatically lengthened the tenor of their investments," she said.
"These changes have exacerbated exposure to interest rate movements. The Council recommends that supervisors continue to monitor and assess the growing risks resulting from the continued search-for-yield behaviors, as well as the risks from potential severe interest rate shocks. I can assure you this is a high priority area for NCUA," she added.
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