Credit unions and other financial institutions should be extra zealous when testing their assets to see how they would be impacted by fluctuations in interest rates, because regulators will be monitoring that closely.
That’s the message from the NCUA, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency in a letter released on Thursday.
“Institutions should measure the potential impact of changes in market interest rates on both earnings and the economic value of capital. Measurement methodologies generally focus on either changes to net interest income/net income, or changes to the economic value of capital over various time horizons. Income simulations are typically used to measure potential volatility in net interest income/net income over various time horizons (generally one to five years),’’ according to the memo.
The regulators recommend that at least once a year financial institutions perform stress tests so they can spot the presence of the four major components of interest rate risk: repricing mismatch, basis risk, yield curve risk and options risk.
The NCUA has issued a proposed rule requiring most federally insured credit unions to have plans in place to monitor interest rate risk. Under the proposed rule, 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.
The agency sent the proposed rules out for a 60-day comment period last year and is currently reviewing the comments.
In their comment letters, CUNA expressed concerns about the scope of the rule while NAFCU mostly praised it.
CUNA wrote that it would “invite micromanagement,’’ by agency examiners. NAFCU wrote that the rule and appendix are “appropriate and could prove useful to credit unions.” NAFCU did urge the agency to let credit unions rely on third-party models in establishing their own.