NCUA s Revised Interest Rate Risk Review Procedures Thomas Fay Senior Capital Market Specialist NCUA
Changes in the Industry Risk Profile (2000-2016) Dec 2000 Mar 2016 Change % change # of FICUs 10,316 5,954-4,362-42% Total FICU Assets ($bill) $438 $1,240 $802 183% # of CU Total Assets over $1b 43 263 220 512% Avg Asset Size ($mill) $43 $208 $165 391% Mortgage Loans to Assets 27% 32% 6% 22% 2
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
Key Changes to 1. Examiner guidance 2. IRR scope and review procedures 4
Scope 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 No Is Supervisory Test High or Extreme? Yes Post 1 st Exam Cycle 1 st Exam Cycle No IRR Workbook Steps SE/EX Judgement if risk is high or extreme 15 Steps 25 Steps 35 Steps 5
Key Changes to (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 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 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) 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 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 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 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 12
Potential Criticisms of Supervisory Test 1. One size fits all 2. Uniform treatment of NMS values 3. Shock-test thresholds may supplant internal policy limits 4. Supervisory test may reduce scope and rigor of risk management programs 5. Shock test model will require adjustment over time 6. Bank supervisors have not adopted a standardized supervisory metric 13
Why Add S To CAMEL? 1. Increased clarity and transparency 2. Enhanced risk analysis of IRR and Liquidity 3. Increased accuracy of IRR rating 4. Improved resource allocation 5. Negligible regulatory burden 6. Improved communication and monitoring of IRR 7. Consistency with the other FFIEC agencies 8. SSA experience has been favorable 14
Questions? Tom Fay tfay@ncua.gov 703-518-1179 15