CUNA President Says NCUA Interest Rate Risk Test Is Inaccurate

Jim Nussle, president and CEO of CUNA.

Letter from CUNA’s Jim Nussle raises concerns over credit union risk evaluations and their consequences.

An NCUA test designed to assess interest rate risk (IRR) at credit unions is not accurately measuring that risk, CUNA President/CEO Jim Nussle told members of the agency board Wednesday.

“Credit unions across the country are experiencing declines in [Net Economic Value (NEV)] Test ratings, often dropping from low or moderate to extreme risk, despite unchanged balance sheets,” Nussle wrote in a letter to NCUA board members.

He noted that CUNA is most concerned that an extreme risk categorization results in the issuance of a Document of Resolution (DOR). That document requires that corrective action be taken to improve the credit union’s evaluation.

Nussle added that the problems credit unions are facing raises questions about whether the NEV test is accurate and should be used by the agency as an examination tool.

Background on the Issue

In explaining the examination tool in 2020, NCUA officials said that it is a capital-at-risk measurement that uses standardized values for non-maturity shares to assess the level of interest rate risk. They said that the measurement aligns well with the agency’s Share Insurance Fund to help identify long-term threats that could affect a credit union’s net worth.

Examiners are required to automatically issue a DOR to a credit union that receives the lowest rating, according to the NCUA.

Inside the CUNA Letter

Nussle said a credit union that receives that lowest rating could be required to sell certain assets—potentially at a loss.

“We are concerned that such a result is not in the best interest of credit unions—or credit union members—particularly since the accuracy of the NEV Test as an [interest rate risk] measurement tool is questionable,” he wrote.

He said also that if the Federal Reserve Board raises interest rates, more credit unions could be affected.

Nussle explained that as a first step, CUNA is asking the agency to change its current policy of requiring examiners to automatically issue a DOR when a credit union receives the worst rating.

“To be clear, it is appropriate for examiners to deal with credit unions exhibiting IRR in a reasonable fashion,” the letter states. “Our concern is that the NEV Test does not reflect the actual level of IRR at a credit union; at best it is merely a rough approximation of actual risk.”

He added that the agency then should work with the credit union industry to determine how the NEV test can be modified to be more accurate.

“Alternatively, it may be appropriate to move away from the NEV Test, given the shortcomings of a one-size-fits-all examination tool,” Nussle concluded.