NCUA Makes Changes in Interest Rate Risk Assessments

Updated process will provide greater flexibility in IRR assessments of credit unions following concerns over accuracy.

As a result of interest rate and economic changes, the NCUA announced last week that it would provide more flexibility in its interest rate risk (IRR) assessments of credit unions.

The change follows a letter from CUNA President/CEO Jim Nussle warning the agency that the assessment was not accurately measuring the risks that individual credit unions pose. Nussle had said that the problems raised questions about whether the IRR test should be used as an examination tool.

The changes were announced in a letter to credit unions from NCUA Chairman Todd Harper. “Due to the changing economic and interest rate environments during 2022, the NCUA reviewed the parameters and risk classifications of the [net economic values] Test and overall IRR supervisory,” Harper wrote. “The changes to the IRR supervisory framework will improve the focus of the NCUA’s supervision of IRR in credit unions given current market conditions.”

How Will the Process Change?

The letter explained that the agency will revise the risk classifications by eliminating the “extreme risk” classification and modifying the “high-risk” classification. In addition, Harper said the NCUA will clarify when a Document of Resolution (DOR) is needed to address interest rate risks and will remove any presumed need for a DOR based on the “supervisory risk” classification.

He added examiners also will be given more flexibility in assigning interest rate risk ratings, noting, however, that credit unions must be diligent in their own assessments.

“Responding to changing economic and interest rate environments is essential to credit unions’ prudent IRR management and the related risks to capital, asset quality, earnings, and liquidity,” he wrote. “Credit unions need to remain disciplined in managing their interest rate, liquidity, and related risks as they navigate the current economic and interest rate environment.”

Further Updates

In a separate supervisory letter, Kelly Lay, director of the NCUA’s Office of Examination and Insurance, wrote that examiner oversight of a credit union will increase if a credit union does not have an effective interest rate risk program. 

“The level and source of IRR exposure will determine the degree of urgency in developing and implementing mitigation strategies,” Lay wrote.

She added, “Riskier strategies can present a significant threat to a credit union’s capital and earnings if not managed appropriately and potentially be an undue risk to the National Credit Union Share Insurance Fund.”

Lay noted, however, that a credit union will not be expected to have a plan of action simply because their IRR classification is high. Instead, the need for a written plan of action will be determined on a case-by-case basis.

CUNA Reaction

Nussle was pleased the NCUA made the changes, saying, “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.”