NAFCU President/CEO Fred Becker has fired off a letter to theNCUA Board urging the regulator to take immediate action regardingexaminers using their own opinions and methods when shock testing credit union balancesheets for interest rate risk.

“They're substituting their own opinions for those of themanagement of the credit union, as well as the expert advice theyare getting from very well-qualified third parties,” Becker said ofthe feedback NAFCU has received from its members. “The examiner isnot responsible for running the credit union. That's for the boardand management to do.”

Becker said he's heard reports of examiners shock testing forinterest rate risk under “absurd” scenarios, such as unrealisticincreases in rates over a six-month period.

“We're taking about things that just aren't realistic,” he toldCredit Union Times. “One in a million chance testing.”

Specifically, Becker said in the letter he sent Friday thatmembers have reported examiners requiring credit unions to setpolicies according to rate shocks outlined in a 16-year-old coredeposit study.

“The examiners then suggested the members initiate drasticbalance sheet restructuring that would necessitate selling largeportions of the long-term (three years or longer) investments andlong-term (five years or longer) loans and shift those dollars intovery short term and/or floating-rate loan and investment productswithout regard to current economic forecasts that expect rates toremain at current low levels for another one to three years,”Becker said in the letter.

To do so, many credit unions would have to curtail their longterm lending and much of their member business lending, he said.Shifting assets this way into very short term products woulddrastically reduce net interest margins, thereby reducing netincome and the member's net worth, which Becker said would seem tobe counter-productive to the overall goals of the NCUA.

Instead, he said, credit unions should have the flexibility todetermine appropriate testing and modeling based onindustry-accepted standards and expert advice from qualifiedthird-party vendors.

And, NAFCU suggests the NCUA provide clearer interest rate riskguidance to examiners, emphasizing that each credit union'ssituation is unique, and the models, assumptions and testing itemploys should be commensurate with its portfolio.