Credit Union Exam Solutions Presents With Flying Colors | NCUA's NEW Interest Rate Risk & NEV Framework with Todd Miller

NCUA's NEW Interest Rate Risk & NEV Framework with Todd Miller

September 19, 2022 / 49:35/E40 Download MP3

Earlier this month NCUA issued a Letter to Credit Unions that revises and updates NCUA's Interest Rate Risk Supervisory Guidance. NCUA also conducted an industry webinar on 9/14/22. On this episode I interview Subject Matter Expert Todd Miller on the letter, and the webinar. We recorded this podcast immediately after the webinar to get our instant response to what was said, and what wasn't said.Clarifying When a DOR to Address IRR Is WarrantedA DOR is not required for any NEV Test or ENT risk classification alone. Similarly, a credit union is not expected to have a plan of action just because their IRR classification is high. Instead, the need for a DOR and a written plan of action are to be determined on a case-by-case basis. The following are examples of when a DOR should be considered:The credit union’s level of IRR represents an undue risk to the Share Insurance Fund, and the credit union is not taking appropriate and prompt action to address its level of IRR.9The credit union has high IRR and has not adequately updated its approach to managing its interest rate, liquidity, and related risks for current market conditions.The credit union has a material governance deficiency (identify, measure, monitor, and control) relative to its level of IRR.10The following are examples of when a DOR may not be necessary:The migration to a high risk classification in the NEV Test or ENT is primarily from a rapid change in interest rates. However, examiners should focus on how the credit union’s management of IRR has been adjusted to the new interest rate environment.The credit union has already acted or has an adequate plan to adapt to the current interest rate environment.11Providing Examiners More Flexibility in Assigning IRR Supervisory Risk Ratings12Examiners will assign the IRR rating based on the quantitative NEV Test or ENT but may improve the rating on other factors. If the NEV Test or ENT show a high or moderate risk classification, examiners may adjust the IRR rating up or down. While these instances may occur, it would be unusual for an examiner to improve the IRR rating when the NEV Test or ENT results in a high risk classification. This scenario will most often result from borderline moderate- to high-risk classifications, though could occur in low- to moderate-risk classifications, as well. For example, in a borderline case, conservative assumptions in the IRR model combined with a low risk qualitative rating may be sufficient for the examiner to improve the credit union’s IRR rating, whereas the opposite may warrant a downgrade. When considering a change to the IRR rating, examiners will fully document the quantitative and qualitative factors that warranted the change to the rating.The review of a credit union’s IRR may result in a high IRR rating and may also warrant a change in the “S” (Sensitivity to Market Risk) CAMELS component rating.Revising Examination Procedures to Incorporate Updated Review Steps When Assessing How a Credit Union’s Management of IRR Is Adapting to Changes in the Economic and Interest Rate EnvironmentExaminers use the IRR Workbook as a job aid when considering topics and questions during the review of IRR. Recognizing the current volatility of economic and interest rate environments, the following topics will be integrated into the IRR Workbook along with a new resource tab (High IRR Job Aid) to understand the range of scenarios and mitigation strategies.The integration of these topics will expand on existing review steps, when applicable for a credit union. For example, if a credit union holds total assets between $500 million and $10 billion with a high NEV Test risk classification, the examiner review will include the source of high IRR, risk management and controls, and potential impact on earnings and capital. Credit unions with total assets exceeding $10 billion require all review steps in the IRR Workbook, regardless of the risk classification.

Clarifying When a DOR to Address IRR Is Warranted

A DOR is not required for any NEV Test or ENT risk classification alone. Similarly, a credit union is not expected to have a plan of action just because their IRR classification is high. Instead, the need for a DOR and a written plan of action are to be determined on a case-by-case basis. The following are examples of when a DOR should be considered:

The credit union’s level of IRR represents an undue risk to the Share Insurance Fund, and the credit union is not taking appropriate and prompt action to address its level of IRR.⁹
The credit union has high IRR and has not adequately updated its approach to managing its interest rate, liquidity, and related risks for current market conditions.
The credit union has a material governance deficiency (identify, measure, monitor, and control) relative to its level of IRR.¹⁰

The following are examples of when a DOR may not be necessary:

The migration to a high risk classification in the NEV Test or ENT is primarily from a rapid change in interest rates. However, examiners should focus on how the credit union’s management of IRR has been adjusted to the new interest rate environment.
The credit union has already acted or has an adequate plan to adapt to the current interest rate environment.¹¹

Providing Examiners More Flexibility in Assigning IRR Supervisory Risk Ratings¹²

Examiners will assign the IRR rating based on the quantitative NEV Test or ENT but may improve the rating on other factors. If the NEV Test or ENT show a high or moderate risk classification, examiners may adjust the IRR rating up or down. While these instances may occur, it would be unusual for an examiner to improve the IRR rating when the NEV Test or ENT results in a high risk classification. This scenario will most often result from borderline moderate- to high-risk classifications, though could occur in low- to moderate-risk classifications, as well. For example, in a borderline case, conservative assumptions in the IRR model combined with a low risk qualitative rating may be sufficient for the examiner to improve the credit union’s IRR rating, whereas the opposite may warrant a downgrade. When considering a change to the IRR rating, examiners will fully document the quantitative and qualitative factors that warranted the change to the rating.

The review of a credit union’s IRR may result in a high IRR rating and may also warrant a change in the “S” (Sensitivity to Market Risk) CAMELS component rating.

Revising Examination Procedures to Incorporate Updated Review Steps When Assessing How a Credit Union’s Management of IRR Is Adapting to Changes in the Economic and Interest Rate Environment

Examiners use the IRR Workbook as a job aid when considering topics and questions during the review of IRR. Recognizing the current volatility of economic and interest rate environments, the following topics will be integrated into the IRR Workbook along with a new resource tab (High IRR Job Aid) to understand the range of scenarios and mitigation strategies.

The integration of these topics will expand on existing review steps, when applicable for a credit union. For example, if a credit union holds total assets between $500 million and $10 billion with a high NEV Test risk classification, the examiner review will include the source of high IRR, risk management and controls, and potential impact on earnings and capital. Credit unions with total assets exceeding $10 billion require all review steps in the IRR Workbook, regardless of the risk classification.

NCUA's NEW Interest Rate Risk & NEV Framework with Todd Miller

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