6 Dos and Don’ts of the NCUA’s NEV Supervisory Test
November 3, 2016
Consider the following as you implement the NCUA’s NEV Supervisory Test:
DO make sure to understand your answers by running NEV with the non-maturity deposit caps the test uses (currently 1% and 4%) before NCUA comes into your credit union.
DON’T forget why NCUA decided to standardize. One of many reasons is that there is “a significant amount of uncertainty surrounding valuation methods” for non-maturity deposits. If you are going to continue to use results of core deposit studies to determine non-maturity deposit values, it will be critical for your board and management to be absolutely clear on how these results will be used, if at all, in decision-making. For example, when testing what-ifs, which assumptions set will drive decisions if one set gives the green light and the other the red light?
DO make sure your policy represents your credit union’s appetite for risk. NCUA has clearly stated this. Avoid saying in policy, “We will accept a moderate level of risk using the thresholds identified in NCUA’s supervisory test.”
DON’T stop your asset/liability management (ALM) at the NEV supervisory test. By definition, any type of standardization means that the unique risks of an institution are not captured. To help with standardization and comparison across credit unions, the new NEV test treats all non-maturity deposits the same, credit union to credit union. As a result, the standardization ignores each credit union’s pricing, not to mention ignoring the pricing on each category such as regular shares, checking, and money markets.
DO remind your board and management that NEV does not quantify profitability (earnings) or risks to profitability and net worth. Earnings do matter. Earnings are what credit unions need to pay for products, services, and delivery channels that will keep them relevant. A simple way to remember that NEV does not quantify profitability is that it does not factor in non-interest income and operating expenses.
DON’T forget that the timing of earnings and risks to earnings matters. NEV collapses all future cash flows to represent what the value would be today if shock interest rate environments were to occur. By definition, this can’t show decision-makers the timing of risks to earnings and, ultimately, net worth.
The world is becoming more complex. This complexity can bring opportunities and risks. The most important thing to remember is that ALM can and should be used to provide decision-makers with actionable business intelligence. The new NEV supervisory test is not designed to provide actionable business intelligence; it is simply a scoping tool.