C. Myblog

Proposed Interest Rate Risk Regulation

April 26, 2011

Newly proposed regulations would require federally insured credit unions to not only have an effective interest rate risk management program, but also a written policy addressing interest rate risk management.  The NCUA has taken this step due to concerns about the level of interest rate risk being taken by many institutions, as material concentrations in long-term, fixed-rate assets continue to be booked in this historically low rate environment—funded largely by short-term deposits.

Most often, managements and boards establish limits at the category or portfolio level, not at the enterprise/aggregate level.  It is not uncommon to see a credit union within their individual category or portfolio levels, yet have a relatively high level of risk at the enterprise level.  In other words, the combination of the individual risks can create an undesirable, aggregate risk profile.  Therefore, agreeing on and managing to aggregate risk levels is a key component of an effective risk management process.  However, establishing aggregate risk limits that make sense from a business perspective, as well as from a safety and soundness perspective, requires in-depth discussions and critical thinking.

These limits can also be a critical driver of financial success both today and as rates change.  So take your time and think it through.

While we believe it is prudent for decision makers to establish enterprise/aggregate risk limits, it is not intended as an endorsement for the proposed regulation.  We will write more on the proposed regulation soon.

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