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NCUA could tighten rate-risk program rules
ALEXANDRIA, Va. (3/18/11)—A proposed rule that would require federally backed credit unions to create written interest rate risk policies and develop an individual interest risk management insurance program was the central topic of Thursday’s National Credit Union Administration (NCUA) board meeting. The rate-risk policies must include procedures for identifying, measuring, monitoring, controlling, and reporting interest rate risk. The policies may be incorporated into many of a credit union’s existing policies, including its investment, asset liability management, funds management, or liquidity policies. However, the policies may also be handled separately, the NCUA said.
Click to view larger image The NCUA on Thursday emphasized that safety and soundness concerns were behind their introduction of new interest rate risk regulations. CUNA plans to review the NCUA's proposal, and will oppose any unneeded or superfluous requirements. (CUNA PHOTO)
Once the interest rate risk programs have been developed, they eill be monitored during the NCUA’s periodic credit union examinations. All credit unions with less than $10 million in assets would be excluded from the proposed rule. Credit unions with $10 million to $50 million in assets would also be excluded if their holdings of mortgages and investments with lifespans of over five years is less than 100% of the credit union’s net worth. Agency staff noted that the complexity of a given credit union’s policy should increaqse with its level of risk, and the amount of time needed to develop interest rate risk management policies will vary from institution to institution. NCUA Chairman Debbie Matz said that the agency is introducing the measure to avoid further credit union failures in the event that interest rates on share deposits and other sources of funds increase. Matz encouraged credit unions to begin planning for the rule as soon as possible. The interest rate risk proposal was unanimously supported by all board members. Low home prices and mortgage interest rates, combined with government home purchase incentives, have led to increased volumes of fixed-rate, long-term mortgage originations, and CUNA Senior Economist Mike Schenk has said that these factors can lead to increased interest rate risk because the cost of funding to hold these long-term loans and other assets in a rising rate environment could outstrip the interest income these long-term, fixed-rate investments earn. The NCUA board said it would be beneficial for credit unions to assess their interest rate risk while interest rates remain at historic low levels. Credit unions’ collective exposure to potential interest rate “shocks” imperils the safety and soundness of credit unions, the NCUA said. While she is sympathetic to the existing regulatory burden that is placed on credit unions, NCUA Board Member Gigi Hyland said that bringing credit unions’ interest rate risks under control is vital. Credit unions would have three months to comply if the rule is adopted as final. There is a 60-day comment period for the proposal. The Credit Union National Association continues to have concerns about over regulation. However, CUNA recognizes the need for credit unions to make sure they manage all risks appropriately, CUNA Deputy General Counsel Mary Dunn said. CUNA will be reviewing the proposal carefully with its examination and supervision subcommittee “and will certainly oppose any requirements they and other credit union officials identify as unnecessary or superfluous,” Dunn added.


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