In January 2012 NCUA adopted a regulation requiring many federally insured credit unions to have a written interest-rate risk (IRR) management policy and a program to effectively implement that policy as part of their asset-liability management responsibilities. The regulation itself is very short. It amends the requirements for federal share insurance (Section 741.3) and is effective Sept. 30, 2012.
The appendix to the regulation provides guidance on NCUA’s expectations. “An effective IRR management program identifies, measures, monitors, and controls IRR and is central to safe and sound credit union operations,” NCUA says. The agency recognizes that it’s impossible to establish a “one size fits all” template, and each credit union’s IRR policy should be unique since credit unions have different risk exposures, operations, products, complexities, and sizes.
NCUA’s Letter to Credit Unions No. 12-CU-05, released last month, further explains its IRR regulation. The letter includes a revised IRR examiner’s questionnaire. Owen Cole, NCUA’s director of capital markets, says this questionnaire will give credit unions a good sense of NCUA’s expectations and what elements examiners will emphasize.
Smaller CUs are exempt
Federally insured credit unions with more than $50 million in assets must comply with the IRR regulation, but federally insured credit unions with less than $10 million in assets are exempt. NCUA decided that small credit unions don’t typically pose much of a threat to the National Credit Union Share Insurance Fund and shouldn’t be subject to the regulatory compliance burden.
Federally insured credit unions with $10 million to $50 million in assets must comply if their total first mortgage loans plus investments with maturities greater than five years equals or exceeds 100% of their net worth. NCUA refers to this as the Supervisory Interest Rate Risk Threshold ratio, or SIRRT ratio.
About 3,200 credit unions (or 45% of all credit unions) will be subject to the rule, according to the agency. Most of them already have policies and programs in place that should comply. NCUA believes about 800 credit unions subject to the new regulation will need to create appropriate IRR management programs.
Although the agency believes credit unions have generally been managing their IRR adequately, it’s concerned that their increased residential mortgage holdings, coupled with increased uncertainty in financial markets, warrants requiring stronger IRR policies and programs for credit unions holding 96% of federally insured credit union assets.
NEXT: Framework for a program