IRR Policy required to qualify for NCUA share insurance

Submitted by sevans on Fri, 01/16/2015 - 3:11pm

Why is the Interest Rate Risk (IRR) rule written as a requirement for insurance?

Interest rate risk is a core risk which confronts FICUs; similar risks exist with regards to lending and investments for which regulatory requirements for insurance already exist. As a requirement for insurance the rule applies to all FICUs. The rule combines the many elements of asset liability management into a comprehensive framework for managing core risk. Of the seven risks in a risk focused exam, Interest Rate Risk is the primary concern of the rule.

NCUA’s basic requirements for capital stress testing

Submitted by sevans on Tue, 01/06/2015 - 4:03pm


General Requirements:

The supervisory stress tests consist of baseline, adverse, and severely adverse scenarios, which NCUA will provide by December 1 of a calendar year. The tests will be based on the covered credit union's financial data as of September 30 of that year, or such other date as directed by NCUA. The tests will take into account all relevant exposures and activities of a credit union to evaluate its ability to absorb losses in specified scenarios over a 9-quarter horizon. The minimum stress test capital ratio is 5 percent.

There are a number of acceptable methods for measuring IRR

Submitted by sevans on Tue, 01/06/2015 - 3:42pm

The IRR management or ALM policy should express IRR measures and limits in terms of gap, earnings (i.e., net income “I], net interest income [NII]), net worth (e.g., mortgage portfolio shock, investment portfolio shock, change in NEV) or a combination of these. For all but the smallest or simplest credit unions, management should establish quantitative IRR measures to alert the credit union of the existence of unacceptable IRR exposure.

Overall, successful ALM programs encompass the following practices:

  • Identifying goals and objectives;
  • Developing strategies;
  • Creating polices and procedures;
  • Managing product offerings and pricing;
  • Identifying, measuring, monitoring, and controlling exposures to risk;
  • Generating adequate income and net worth over varying economic conditions; and
  • Maintaining financial flexibility.

Credit unions can reduce investment risks by:

  • Fully evaluating each type of investment before purchase, including the creditworthiness and/or the financial condition of the issuer and the potential IRR of the proposed investment;
  • Analyzing the financial condition and reputation of any intermediary to the transaction, such as a broker-dealer; and
  • Diversifying the investment portfolio by type, maturity, geographical location, guarantor, etc. 

The extent of the examiners’ investment reviews will depend on the following:

  • The results of reviews of investment policies, procedures, practices, and internal controls;
  • The adequacy of management’s risk monitoring system for investments;
  • The condition of investment records;
  • The volume and materiality of investment transactions; and
  • The degree of problems disclosed by previous audits or examinations.