Prepare for Interest-Rate Risk Reg

Boards are responsible for having appropriate policies in place by September.

June 13, 2012

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

Framework for a program 

All federally insured credit unions that must have an IRR policy and program should incorporate these five elements into their program, NCUA says:

1. A board-approved IRR policy;
2. Oversight by the board of directors and implementation by management;
3. Risk measurement systems assessing IRR sensitivity of earnings and/or asset and liability values;
4. Internal controls to monitor adherence to IRR limits; and
5. Decision making informed and guided by IRR measures.

The regulation’s appendix includes a chart to help credit unions determine the adequacy of their IRR policy and the effectiveness of their program to manage IRR. NCUA also provides additional guidance on its expectations for large credit unions (more than $500 million in assets) with complex or high-risk balance sheets.

IRR policy elements 

For credit unions subject to the new regulation, their boards of directors obviously bear the responsibility to ensure an appropriate IRR policy is in place by the end of September. NCUA suggests directors obtain advice and training to further their understanding of these oversight responsibilities. And for directors of credit unions with limited staff, the reality is that some of management’s IRR implementation activities may require board assistance.

“Credit unions have the option of either creating a separate IRR policy or incorporating it into investment, ALM [asset-liability management], funds management, liquidity or other policies,” the agency says.

CUNA suggests credit unions that cover IRR throughout their policies at least have a short document describing where the elements of interest-rate risk are addressed so their examiners can see that they’ve reviewed their existing policies for compliance.

A written IRR policy should, according to NCUA:

► Identify committees, persons, or other parties responsible for review of the credit union’s IRR exposure.
► Direct appropriate actions to ensure management takes steps to manage IRR and identify, measure, monitor, and control IRR exposures.
► Specifyhow often management will report on measurement results to the board to ensure routine review of information that’s timely (e.g. current and at least quarterly) and in sufficient detail to assess the credit union’s IRR profile;
Set risk limits for IRR exposures based on selected measures (e.g. limits for changes in repricing or duration gaps, income simulation, asset valuation, or net economic value);
► Choosetests, such as interest rate shocks, the credit union will perform using the selected measures;
► Provide for periodic review of material changes in IRR exposures and compliance with board-approved policy and risk limits;
► Provide for assessment of the IRR impact of any new business activities prior to implementation (e.g. evaluate the IRR profile of introducing a new product or service); and
Specify, at least, an annual policy evaluation to determine whether the policy is still commensurate with the credit union’s size, complexity, and risk profile.

“The board of directors is responsible for oversight of their credit union and for approving policy, major strategies, and prudent limits regarding IRR,” NCUA says. “To meet this responsibility, understanding the level and nature of IRR taken by the credit union is essential. Accordingly, the board should ensure management executes an effective IRR program.” 

NEXT: Cuna Concerns

CUNA’s concerns

CUNA expressed concern to NCUA that examiners will view the lengthy “guidance” accompanying the
new regulation as a “checklist.”
To address this concern and also concerns about examiners’ inconsistent application of regulations, NCUA has conducted examiner training.

“It’s not the intent of the rule for examiners to subjectively impose unduly standardized supervisory oversight,” the agency says. “Examiners will be expected to apply the standards within a consistent framework based on their knowledge of each credit union’s operations and available resources.”

Expect examiners to ask questions about IRR policies and programs even before the compliance date at the end of September. 

Before approving the new IRR regulation last winter, the NCUA Board asked its staff: “Why should we put this regulation in place since interest rates aren’t expected to rise notably any time soon?” 

“It’s good to repair the roof before it rains,” agency staff answered.

So get your IRR policy and program nailed down in the coming months.

COLLEEN KELLY is federal compliance counsel for CUNA.


CUNA (select “regulations & compliance”):

  1. Summary of NCUA’s regulation, select “regulatory advocacy”
  2. Archived webinars, select “training and education”


  1. Letter to Credit Unions No. 12-CU-05 (select “resources for credit unions”)
  2. Webinar schedules