Agency releases interest rate risk review procedural changes

Oct. 18, 2016 -- Changes to interest rate risk review procedures – as well as a standardized measurement of the risk – will be instituted by NCUA at the beginning of next year, the agency wrote in Letter to Credit Unions (16-CU-08) posted on its website Monday.

According to the letter (signed by Board Chairman Rick Metsger) the standardized measurement will be used to “scope and rate interest rate risk assessments more efficiently and effectively.” The letter adds that agency field staff will apply the changes using the Interest Rate Risk Review Procedures Workbook and Guide to Using NCUA’s Interest Rate Risk Procedures Workbook – both attached to LTCU 16-CU-08. The agency also stated, in the letter, that NCUA revised the chapter of the Examiner’s Guide that provides interest rate risk information.

“Interest rate risk is a potentially significant risk that arises from credit union activities and is inherent to some degree in all credit unions. Therefore, it is critical that your credit union adopt safe and sound practices associated with interest rate risk management,” Metsger wrote in the letter.

Key changes in the IRR supervision outlined in the letter include:

  • The development of the Interest Rate Risk Review Procedures Workbook;
  • The updating of interest rate risk tolerance thresholds in the Net Economic Value Supervisory Test;
  • The creation of an estimated net economic value tool for credit unions with total assets of $50 million or less; and
  • The revision of the interest rate risk chapter in the Examiner’s Guide.

According to the letter, the Net Economic Value Supervisory Test measures the relative degree of market risk inherent in a credit union’s balance sheet under a prescribed interest rate shock scenario using standardized non-maturity share values. The agency stated that an “extreme rating” generated by the test “ could trigger the administrative process for a potential downgrade of your credit union’s net worth classification; however, we anticipate such circumstances to be very rare.”

NCUA LTCU 16-CU-08: Revised Interest Rate Risk Supervision