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.”
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