Credit unions and other financial institutions should be extrazealous when testing their assets to see how they would be impactedby fluctuations in interest rates, because regulators will bemonitoring 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 letterreleased on Thursday.

“Institutions should measure the potential impact of changes inmarket interest rates on both earnings and the economic value ofcapital. Measurement methodologies generally focus on eitherchanges to net interest income/net income, or changes to theeconomic value of capital over various time horizons. Incomesimulations are typically used to measure potential volatility innet 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 financialinstitutions perform stress tests so they can spot the presence ofthe four major components of interest rate risk: repricingmismatch, basis risk, yield curve risk and options risk.

The NCUA has issued a proposed rule requiring most federally insured credit unions tohave plans in place to monitor interest rate risk. Under theproposed rule, federally insured credit unions with assets of morethan $50 million and smaller ones with potentially risky loanportfolios would have to have policies to evaluate theinstitution's interest rate risk exposure, set risk limits and testfor interest rate shocks.

The agency sent the proposed rules out for a 60-day commentperiod last year and is currently reviewing the comments.

In their comment letters, CUNA expressed concerns about the scope of therule while NAFCU mostly praised it.

CUNA wrote that it would “invite micromanagement,'' by agencyexaminers. NAFCU wrote that the rule and appendix are “appropriateand could prove useful to credit unions.” NAFCU did urge the agencyto let credit unions rely on third-party models in establishingtheir own.