NCUA Updates Supervisory Framework to Interest Rate Risk

On Thursday, the NCUA released a Letter to Credit Unions updating its Interest Rate Risk (IRR) supervisory framework. The updates come as, according to the letter, in 2022 the industry has experienced the “sharpest increase in interest rates in decades.”

The NCUA letter stated, “A sharp rise in interest rates may amplify market risk exposure to earnings and capital. This occurs because a credit union’s assets and liabilities do not reprice equally or concurrently. This timing (or duration) mismatch, combined with a sharp rise in interest rates, may result in sharply lower net economic values (NEV) as measured using the NCUA’s NEV Supervisory Test (NEV Test) or the Estimated NEV Tool (ENT).”

A summary of the updates included the following:

• Revising the risk classifications by eliminating the extreme risk classification and modifying the high risk classification.
• Clarifying when a Document of Resolution (DOR) to address IRR is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan.
• Providing examiners more flexibility in assigning IRR supervisory risk ratings.
• Revising examination procedures to incorporate updated review steps when assessing how a credit union’s management of IRR is adapting to changes in the economic and interest rate environment.

CUNA President/CEO Jim Nussle welcomed the updates to the supervisory framework.

“We thank (the) NCUA for quickly providing relief for credit unions facing declining Net Economic Value (NEV) Supervisory Test ratings due to the rapidly changing interest rate environment,” Nussle said. “(The) NCUA’s actions to provide examiners more flexibility and eliminating the ‘extreme risk’ classification will minimize any adverse impact on credit unions despite unchanged balance sheets.”

According to a statement from NAFCU, officials met with the NCUA in July to discuss IRR challenges faced by credit unions.

“The association also shared the NCUA’s ongoing work related to IRR in an insight post last month, underscoring NAFCU’s request that the agency immediately raise the permissible interest rate ceiling, and specifically encouraging the agency to establish a floating permissible interest rate ceiling equal to a 15% spread over the prime rate,” NAFCU’s statement read.

The NCUA will host a webinar on Sept. 15 for credit union officials to explain the updates and respond to questions from those attending. Those interested can register using this link.