C. Myblog

Some Examiner Requests Conflict With Written Guidance – Make Sure to Get Clarity of Reasoning

August 26, 2011

We are curious as to why some examiners are requesting that credit unions establish risk limits based on 12-month net income simulations.

This request is interesting in light of what was outlined in the Interagency Advisory on Interest Rate Risk Management.  The guidance states:  “When using earnings simulation models, IRR exposures are best projected over at least a two-year period.”  The guidance goes on to say:  “However, to fully assess the impacts of certain products with embedded options, longer time horizons of five to seven years are typically needed.”

If your examiner requests that you establish risk limits based on a 12-month simulation, consider asking:  “How will managing risks with such a short-term view protect our credit union and the insurance fund, especially in light of historically low interest rates?”

Your examiner may counter by saying they use NEV to look long-term.  However, remember that NEV is defined as the fair value of assets minus the fair value of liabilities and tells you nothing about your earnings today or how they can change as rates change.

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