NCUA s Revised Interest Rate Risk Supervision NAFCU IRR Webinar December 7, 2016

Transcription

1 NCUA s Revised Interest Rate Risk Supervision NAFCU IRR Webinar December 7, 2016 Owen Cole Director, Division of Credit and Capital Markets Tom Fay - Senior Capital Market Specialist Rob Bruneau - Senior Capital Market Specialist

2 The Key Document to the Revised IRR Supervision 2

3 Why 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 3

4 Significant changes to NCUA s IRR Supervision 1. Development of the IRR Review Procedures Workbook 2. Updating of IRR tolerance thresholds in the Net Economic Value (NEV) Supervisory Test 3. Creation of an estimated NEV tool for credit unions with total assets of $50 million or less 4. Revision of the IRR chapter in the Examiner s Guide 4

5 IRR Supervision Scope NAFCU December 7,

6 What is the Estimated NEV Tool? 1. Calculates a credit union s NEV for base case and basis point scenarios using: Call report data Predefined sensitivities for assets and contractual-maturity liabilities Standardized values for non-maturity shares 1% in base case (book to base) 4% in a +300 basis point shock (base to shock) 2. Assigns a risk classification of low, moderate, high, or extreme for the post shock NEV ratio and sensitivity. 6

7 How Will the IRR Review Change? Market Risk Earnings at Risk Stress Testing Measurement Systems Risk Management Overall IRR Rating NEV Supervisory Test - IRR Rating Floor 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 Summary of Workbook tabs Final IRR rating 7

8 What is the NEV Supervisory Test? 1. Capital-at-risk measure widely used in risk management 2. Captures longer-term risk of embedded options 3. Two measurements: 1. Post-shock NEV ratio 2. NEV sensitivity to a +300 bp shock 4. The non-maturity share valuations are standardized for base and shocked scenarios 5. Risk levels classified as Low, Moderate, High, and Extreme 6. Worst of the two risk levels to be used as the IRR Supervisory Rating 8

9 NEV Supervisory Test Risk Thresholds 9

10 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) 10

11 Should credit unions adopt the NEV Supervisory Test Risk Classifications as Internal Policy Limits? No credit unions should not adopt the supervisory risk classifications a. NCUA developed the NEV Supervisory Test based on its own risk tolerance thresholds for the NCUSIF b. Field staff will take exception to credit unions that convert policy limits to the NEV Supervisory Test classifications. 11

12 How Will the IRR Category Assessment be Reflected in the L Component Rating of CAMEL? Field staff will continue to assign L component ratings in accordance with Letter to Credit Unions 07-CU-12, CAMEL Rating System. 12

13 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 13

14 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 14

15 Questions? 15