ALEXANDRIA, Va. — Federally insured credit unions with assets of more than $50 million and smaller ones with potentially risky loan portfolios would have to have policies to evaluate the institution’s interest rate risk exposure, set risk limits and test for interest rate shocks.
Those are among the provisions of the policy that the NCUA board unanimously sent out for a 60-day comment period at last Thursday’s meeting.
Federally insured credit unions with assets $10 million to $50 million would have to comply if they hold first mortgages and investments with maturities greater than five years that are equal to or greater than 100% of their net worth.
These written policies would have to identify people and committees responsible for reviewing the interest rate exposure; mandate appropriate actions to ensure that executives manage interest rate risks in a way that interest rate exposure is measured, monitored and controlled; state how often management must report to the board; set risk limits based on measures such as income simulation and asset valuation; choose tests to measure interest rate shocks; provide for periodic review of interest rate exposure; assess the impact of any new business ventures on the credit union’s interest rate risk; and provide an annual evaluation for the policy.
Office of Capital Markets Director J. Owen Cole said the policy is needed because credit unions are relying more heavily on real estate loans. He noted that in 1995, 19.7% of the loan portfolios at federally insured credit unions was in real estate loans while as of last June it had risen to 34.4%.
"This collective exposure to interest rate shock represents a material threat to safety and soundness," he said.
Cole said the requirements weren’t designed to be one size fits all, and there will be flexibility based on the unique circumstances at each credit union.
He noted that approximately 75% of the credit unions that would be required to have written policies already have them in place. Approximately 800 credit unions would have to develop written policies.
NCUA Chairman Debbie Matz said the proposed rule was needed because even though a considerable number of credit unions had heeded the agency’s warnings about making plans in this area, some had not done so. By having these policies in place, credit unions will be better prepared to adapt to the threats to their financial condition that could come when interest rates rise, which they will invariably do.
In response to a question from Matz about why the agency’s staff decided to include some smaller credit unions, NCUA Executive Director David Marquis said it wouldn’t take much interest rate movement for them to be vulnerable, especially if they have heavy investments in long-term assets.
NCUA Board Member Gigi Hyland said that while credit unions are "overwhelmed by a Chinese water torture of regulations," this regulation is needed to send a call out to credit unions that this [interest rate increase] is coming."
NAFCU Vice President and General Counsel Carrie Hunt said the proposals weren’t a huge surprise, and they will require a great deal of education for credit unions. She added that she hopes examiners will show flexibility and allow for extensive discussions on the plans between the examiners and the credit union executives.
The board also sent out for public comment a proposed rules change to allow loans that the NCUA makes to credit unions merging with or acquiring a troubled credit union to be counted in the computation of net worth. The agency was allowed to do that in a law signed by President Obama earlier this year.
The board also unanimously approved technical corrections to the rule on corporate credit unions it approved last year. It modifies the definition of collateralized debt obligations to exclude commercial mortgage-backed securities.
The board unanimously approved a final rule changing the definition of low-risk assets to extend 0% risk weighting to debt instruments backed by the NCUA.
NCUA CFO Mary Ann Woodson told the board that the number of troubled credit unions dropped slightly in February.
There were 360 CAMEL 4 and 5 credit unions at the end of February, compared with 369 at the end of January. Last month’s figure represented 4.97% of all insured shares.
There were 1,803 CAMEL 3 credit unions at the end of February, compared with 1,819 at the end of January. February’s figure represented 17.67% of insured shares.