Are Examiners Forcing IRR Actions? Video CUTs
NCUA Board Chairman Debbie Matz and Board Member Rick Metsger answered claims of agency examiners requiring some credit unions to sell off long-term investments to address interest rate risk concerns.
Credit union executives who asked to remain anonymous pointed CU Times to the financial reports of First Financial Federal Credit Union in Lutherville, Md., and Erie Federal Credit Union in Erie, Pa. Financial performance reports posted on the NCUA’s website showed the two reported large non-operating expenses in recent quarters, with corresponding reductions in investments and increases in cash holdings.
The $1 billion First Financial reported a $10.8 million non-operating expense as of Dec. 31, 2013, and another $4.7 million during the first quarter of 2014.
The $394 million Erie FCU reported a $3.7 million non-operating expense as of March 31, 2014.
Neither credit union returned calls asking for more information about the losses.
Matz would not comment directly on those two credit unions but said she would not be surprised if examiners had suggested credit unions examine their portfolio and make changes.
“I don’t know if they told them they need to specifically sell off certain securities but that they just need to re-calibrate the risk on their books,” Matz said.
“I’m not familiar with those two situations but it wouldn’t surprise me if there was some very serious discussions because we are concerned that some credit unions are holding too much interest rates on their books and are not making the commensurate adjustments,” she added.
Matz noted that the NCUA currently has a rule requiring credit unions to develop a policy to consider interest rate risk and make sure it’s within viable parameters.
“Some credit unions have not done that or have made faulty assumptions and so examiners have been trained. We have not really yet implemented the policy of having examiners go out there and tell credit unions they need to take actions to modify their books based on interest rate risk,” Matz said.
“In some cases where examiners have been extremely concerned, I’m sure they have made suggestions that credit unions take some action before it’s too late,” Matz added.
Metsger said examiners identify areas where credit unions need to make modifications but stressed that in the end, the credit union decides which investments assets or liabilities to adjust.
“Our examiners will have those direct contacts with credit unions, show them the entire balance sheet and indicate where it’s necessary they make some adjustments but it’s always up to the credit union to decide what are those assets or liabilities that they need to adjust – that’s going to be their choice,” Metsger said.
“I’ve never had anything come to my desk about ‘someone told me to sell this specific investment’ and that wouldn’t be appropriate. What is appropriate though is when you are overweighed in an asset that poses interest rate or credit risk, it is the examiner’s responsibility to have that dialogue with the credit union. It’s always the credit union’s responsibility then to decide how to re-weight that balance sheet,” Metsger added.