• Put in place risk measurement systems to assess the sensitivity of earnings and/or asset and liability values to interest rate risk.

• Adopt internal controls to monitor adherence to interest rate risks.

• Make decisions informed and guided by interest rate risk measures.

The rule applies to all federally insured credit unions with assets of more than $50 million. Those institutions with assets of between $10 million and $50 million must comply if the total of first mortgage loans they hold combined with total investments with maturities greater than five years is greater than 100% of their net worth.

NCUA Chairman Debbie Matz said that the rule is needed because while "banks have steadily reduced their interest rate risk exposure since 1995, credit unions have increased their exposure by more than 50%."

She noted that credit unions hold nearly 31% of their assets in long-term fixed-rate mortgages, compared to only 18% at banks.

Matz added that about one-third of all credit unions have such large holdings of long-term assets, they will be exposed by a rapid rise to pre-recession rates and it could reduce their net worth by as much as 20%.

Larry Fazio, who runs the agency's Office of Examination and Insurance, said interest rate risk has long been a supervisory expectation, but the rule is needed in light on the added risks that credit unions face.

He added that the agency has seen a continual increase in credit unions taking more risks, and this could increase the exposure of the NCUSIF.

The issue of interest rate risk has been dealt with by all bank regulators. Recently, the federal financial regulators issued a letter urging aggressive steps to monitor the risk.

The new NCUA rule takes effect Sept. 30.

The board also sent out for a 30-day comment period a proposed rule requiring federally insured credit unions to have written loan workout policies and calculate and report troubled debt restructuring loan delinquencies based on restructured contract terms.

The rule would also require credit unions to keep member business workout loans in a nonaccrual status until it receives six consecutive payments under the modified terms of the loan. 

The rule would no longer require credit unions to manually track the modified loans and thus provide regulatory relief, Matz said.

However, she noted that the agency had to strike a delicate balance between allowing credit unions to help their members while at the same time minimizing the risk to the credit union. She pointed out that more than 16% of outstanding modified loans remain delinquent.

The board also voted to seek additional input before issuing a final rule on derivatives. It is seeking answers to these questions: 

• How much expertise should a federal credit union have on staff before it is allowed to trade in derivatives?

• Should a FCU be required to have a minimal CAMEL rating or net worth?

• Should a FCU have to demonstrate that it has a material interest rate risk or other risk management need to be granted independent derivatives authority?

• Should FCUs be limited to interest rate swaps and caps and should swaps be limited to pay-fixed/receive-floating instruments?

• Should the NCUA establish exposure limits or mandate the credit union's board to establish them?

• Are there ways to mitigate counterparty risk besides posting collateral?

The agency has been engaged since last year in trying to come up in a policy for allowing credit unions to trade in certain kinds of derivatives, especially as a way of protecting against interest rate risk.

Matz said the agency's goal is to "safely allow more credit unions to use derivatives responsibly as a hedge against interest rate risks."

The agency initially sought input last June but Matz said some of the responses from trade associations and credit unions indicated that the agency needed to have more information before issuing a final rule.

There is a 60-day period to respond to the agency's questions.