ALM

Reclassification based on supervisory criteria other than net worth.

Subject to §702.102(b) and (c), the NCUA Board may reclassify a “well capitalized,” “adequately capitalized” or “moderately capitalized” new credit union to the next lower net worth category (each of such actions is hereinafter referred to generally as “reclassification”) in either of the circumstances prescribed in §702.102(b).

Net worth categories.

A federally-insured credit union defined as “new” under this section shall be classified (Table 6 page 1))—

(1) Well capitalized if it has a net worth ratio of seven percent (7%) or greater;

(2) Adequately capitalized if it has a net worth ratio of six percent (6%) or more but less than seven percent (7%);

(3) Moderately capitalized if it has a net worth ratio of three and one-half percent (3.5%) or more but less than six percent (6%);

Net worth measures.

For purposes of this part, a new credit union must determine its net worth category classification quarterly according to its net worth ratio as defined in §702.2(g).

http://www.ecfr.gov/cgi-bin/text-idx?SID=a5890409b9081ac25cce8d741bd0f23...

For purposes of this part, the effective date of a federally-insured credit union's net worth category classification shall be the most recent to occur of:

(1) Quarter-end effective date. The last day of the calendar month following the end of the calendar quarter; or

What should credit unions do to prepare?

We (NCUA) encourage you to review the new IRR rule on the NCUA website located at http://www.ncua.gov/Legal/Regs/Pages/FIRegulations.aspx.

If your credit union holds between $10 million and $50 million in total assets, you should determine whether the new rule applies to you as determined by your SIRRT ratio on the most recent Financial Performance Report.

As noted in the rule preamble, FICU (federally insured credit unions) exposure to IRR from first mortgage loans and long-term investments grew substantially during the last interest-rate cycle. Indeed, aggregate exposure of FICUs by the SIRRT ratio increased from 199% at year-end 2005 to a peak of 271% in March 2011. We expect exposure to remain high for some time because of the longer-term nature of assets in the SIRRT numerator.

The agencies believe that a well-managed bank will consider both earnings and economic perspectives when assessing the full scope of its interest rate risk exposure. The impact on earnings is important because reduced earnings or outright losses can adversely affect a bank's liquidity and capital adequacy. Evaluating the possibility of an adverse change in a bank's economic value of equity is also useful, since it can signal future earnings and capital problems.

Senior management is responsible for ensuring that interest rate risk is managed on both a long range and day-to-day basis. In managing the bank's activities, senior management should:

For its part, a bank's board of directors has two broad responsibilities:

Interest rate risk is the exposure of a bank's financial condition to adverse movements in interest rates. It results from differences in the maturity or timing of coupon adjustments of bank assets, liabilities and off-balance-sheet instruments (repricing or maturity-mismatch risk); from changes in the slope of the yield curve (yield curve risk); from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar repricing characteristics (basis risk--e.g.