NCUA’s Interest Rate Risk Questionnaire – Starting the Conversation
More institutions are being presented with NCUA’s Interest Rate Risk Questionnaire in advance of examinations and being asked to fill them out. During the preparation for an examination, this may seem like the last thing a busy management team should be concerned with, but it should be taken as an opportunity to refresh credit union management teams on how they approach interest rate risk management.
Think of filling this questionnaire out as sort of a pre-test; it provides an advance look at questions an examiner will likely
ask – or will at least seek to answer – during the course of an exam. Below are some sample questions, along with considerations that should be made in determining how to answer:
1) Are the IRR measures and tests sufficiently rigorous to capture the credit union’s IRR?
The answer to this question should be addressed taking into consideration each specific credit union’s financial structure and complexity, but some key considerations should be:
- Does the analysis look beyond the traditional 300 basis point rate shock? Does it automatically twist the yield curve?
- Do you stress test key assumptions at least annually? Key assumptions minimally include deposit behaviors and prepayment speeds.
- Do income simulations extend beyond two years?
- If NEV is used, do decision-makers understand that three significant sources of risk (high operating expense structures, increasing credit risk which impacts provision expense, and threats to non-interest income) do not impact NEV? It is prudent to assess these threats to earnings and net worth outside of NEV simulations.
2) Do the management and board understand the level and nature of IRR taken by the credit union?
Many management teams may be hesitant to answer this question because it could be taken in so many different contexts (and there are so many different levels of understanding). In responding to this question, consider:
- Can our management and board articulate if the credit union has interest rate risk present in the structure, and if so, at what market rate level does this materially impact earnings?
- Can our management and board comment on whether the credit union is within risk tolerance levels (limits)?
- Can our management and board comment on the potential interest rate risk impact of executing on board-approved long-term strategic plans (i.e., “Are we planning on taking more or less interest rate risk, and why?”)?
The above questions are only two of the over 100 included in the questionnaire. While there is a lot to consider, if presented with the opportunity to fill this out in advance of an exam, taking it as a preparation step or a “pre-test” should help to ensure a more productive conversation concerning interest rate risk in the upcoming exam.
