NCUA Urged to Focus on IRR

December 4, 2015 at 8:25 am Leave a comment

Just in time for the FED’s raising of interest rates, NCUA’s Office of Inspector General (OIG) has concluded that interest rate sensitivity should be separately assessed and graded as part of the examination process.

Currently NCUA is alone among the major federal regulators in using a CAMEL system that doesn’t separately rate an institution’s sensitivity to interest rate risk. Instead, NCUA has always assessed sensitivity as part of its assessment of a credit union’s liquidity. While generally being highly complimentary of NCUA’s ongoing efforts to guard against interest rate risk, the Inspector General is concerned that “NCUA may not be effectively capturing IRR when assigning a composite CAMEL rating to a credit union.” According to the report, “this occurs because NCUA assesses sensitivity to market risk and liquidity under the L in the CAMEL rating system,” which may understate or obscure the level of a credit union’s risk.

The OIG’s recommendation is consistent with the direction in which NCUA has headed. For instance, credit unions with $50 million or more in assets are already required to have IRR policies and procedures. Furthermore, while it agreed to remove interest rate risk as a consideration in the new Risk-Based Capital Framework, it stressed that it would be releasing detailed guidance related to IRR management.

I have talked about this issue with some of my more faithful readers in the past and I can hear the groans already. I agree with you that NCUA’s emphasis on IRR for the past several years has bordered on counterproductive paranoia. That being said, this is a proposal that makes sense. Let’s face it, interest rate risk is too important an area not to be subject to a clear-cut examiner evaluation.

On that note, enjoy your weekend.

Entry filed under: Compliance, General, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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