NCUA E&I/ DCCM. Interest Rate Risk Supervision and Adding S to CAMEL. NCUA Webinar August 18, pm EDT

Transcription

1 NCUA E&I/ DCCM Interest Rate Risk Supervision and Adding S to CAMEL NCUA Webinar August 18, pm EDT

2 Why the Supervision Update is Necessary 1. Respond to NCUAB supervisory priorities (expectations) 2. Address new requirements: a. IRR Rule ( 741 eff. September 2012) b. Derivatives Rule ( 703 eff. April 2014) 3. Enhance examiner guidance 4. Reduce inconsistency 5. Identify outlier risk 6. Continuous Quality Improvement 2

3 Key Changes to IRR Supervision (Part I) 1. Examiner guidance 2. IRR scope and review procedures 3. IRR risk-tolerance thresholds (NEV) 3

4 1 st Exam Cycle IRR Supervision Scope (March 2016 Data) Total Assets under $50m Total Assets between $50m and $500m Total Assets of $500m or greater 3,681 CUs $55b 1,779 CUs $283b 493 CUs $903b Is Supervisory Test High or Extreme? Post 1 st Exam Cycle No Yes Estimated NEV Tool ENT IRR Workbook not required 15 Steps 25 Steps 35 Steps 4

5 Key Changes to IRR Supervision (Cont d) 3. IRR risk-tolerance thresholds (NEV) a) Traditional +/- 300 basis point supervisory test b) Thresholds for post-shock NEV ratio and sensitivity c) Levels for low, moderate, high and extreme IRR d) Utilizes CU data (internally generated NEV reports) e) Non-maturity share benefit (value) capped for Base and Shock scenarios 5

6 Why a NEV Supervisory Test 1. Captures longer-term risk of embedded options 2. Capital-at-risk measure 3. Total-balance-sheet metric 4. Widely utilized in risk management 5. Superior to Call Report metrics (NLTA, SIRRT, 17/4) 6. Data exists in majority of larger institutions 7. NCUA can readily capture, archive and study 8. Better IRR review utility for small credit unions 6

7 Why the Standardization of Non-Maturity Shares 1. Uncertainty a. Out of sample forecast risk b. Impact from crisis/recession (surge deposits) c. Technology 2. NMS observations in the CU industry a. Wide dispersion of valuation assumptions b. No market consensus on values c. NMS comprise > 70% of liabilities on average 3. Standardization approach a. 1% benefit for Base case scenarios b. 4% benefit for shocked scenario (currently +300bps) 7

8 NEV Supervisory Test Risk Thresholds Risk Level Low Moderate High Extreme Post-shock NEV NEV Sensitivity (%) Above 7% Below 40% 4% up to 7% 40% to 65% 2% up to 4% 65% to 85% Below 2% Above 85% Note: NCUA has made use of a NEV metric in the current Examiner s Guide since 2000 in Chapter 13 8

9 Key IRR Review Areas Market Risk Earnings at Risk Stress Testing Measurement Systems Risk Management NEV Supervisory Test Analysis of Balance Sheet Valuations Review of Scenarios Review of results/assumptions Review of Scenarios Results Platform assessments Data controls Oversight Policies/Reporting/Controls/Staff 9

10 Benefits for Credit Unions 1. Shifting the focus towards IRR outliers 2. Uniform, measurable, consistent and transparent IRR measure 3. Increased clarity of supervisory expectations 4. Increased accuracy of IRR rating 5. Greater consistency by examiners 6. Risk-focused discussions (majoring in majors) 7. Reduced examination burden for most 10

11 Benefits for Supervision 1. Ability to more uniformly and consistently measure risk across all CUs (baseline and benchmark) 2. Enhanced risk analysis and surveillance of IRR 3. Improved resource allocation 4. Increased clarity and transparency 11

12 How will we transition to an S Rating? Today: CAMEL Letter No. 07-CU-12 Future: CAMELS Letter No. xx-cu-xx Liquidity L C A M E L S ALM IRR New IRR supervisory rating will be incorporated into existing scheme (part of L rating) for now Any future CAMELS rating methodology would be issued for public notice and comment and separates liquidity from market risk sensitivity 12

13 Next Steps 1. Finalize the Examiner Guidance 2. Communicate to Credit Union Industry via Letter to Credit Unions which will include the revised Examiner Guide, Procedures Workbook and Frequently Asked Questions 3. Complete the Agency-wide Examiner training on the revised IRR Guidance 4. Implement the revised IRR Supervision 13

14 Q&A 14