Regulators Focus on Interest-Rate Risk
Be prepared to answer pointed questions from examiners.
Examiners, supervisory authorities, and NCUA leadership have been warning credit unions for the past few years about the dangers related to increases in market interest rates, says Mike Schenk, CUNA’s interim chief economist.
“More specifically, they’re concerned about what those increases are likely to mean for credit unions’ bottom-line results, our capital position, and, most importantly, the position of the National Credit Union Share Insurance Fund,” Schenk said during CUNA’s Pressing Economic Issues Series (PEIS) in July.
“Have interest-rate risk exposures risen, and risen dramatically? Will increases come sooner rather than later? A couple of developments over the course of the last month make that more likely,” he says—namely a faster-than-anticipated labor market recovery.
This has some raising red flags over credit unions’ long-term asset exposure, Schenk says.
"While it is true that credit unions’ longer-term asset holdings have increased, the increases have been modest and the levels appear manageable," he says. "Furthermore, the growth in interest-rate risk exposure we’ve seen has occurred at the same time that exposure to other risks—liquidity and credit risks—have been falling to cyclical lows. In other words, aggregate credit union risk profiles are low and seem manageable."
Although credit unions’ long-term assets finished 2013 at an all-time high of roughly 36% of total assets, this reading is less than six percentage points above pre-recession levels. "To put the exposure in context: federally insured savings and loan institutions in the early 1980s reported long-term asset ratios that were equal to roughly 80% of total assets," Schenk says.
NCUA has stated that “interest-rate risk is the most significant risk the credit union industry faces right now,” according to the CUNA Environmental Scan (E-Scan). That means credit unions can expect examiners to ask more pointed questions about their interest-rate risk, particularly those that have a large concentration of fixed-rate mortgages.
“Be prepared to show examiners that you recently reviewed your interest-rate risk,” E-Scan advises, and “consider bringing in an outside expert to discuss enterprise risk management concepts and strategies with your board and senior staff.”
Click here for a condensed version of Schenk’s July 2014 PEIS discussion on interest-rate risk.