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Interest Rate Risk Policy and Management Program

Recently, the NCUA instituted a new rule regarding credit unions Interest Rate Risk Policy and the accompanying Interest Rate Risk Management Program. This new Interest Rate Risk management provision is found in Part §741.3(b)(5)(i) of NCUA Rules and Regulations:

Beginning on September 30, 2012, certain federally insured credit unions (FICUs) will be required to adopt a written policy on Interest-Rate Risk (IRR) management and a program to implement it effectively.

In NCUA Letter 12-CU-05, the regulator outlines which credit unions are exempt and which are subject to the new rule (see additional resource link).

Validating IRR Modeling

Credit unions subject to the new rule requirements that already have an Interest Rate Policy and in-house Interest Rate Risk (IRR) modeling program in place may still be required to have their program validated.  Much like an external financial auditor audits the internal financial results, credit unions may need an external party to validate the IRR measurement, the process and reasonableness of assumptions, and the results.

Credit unions may also want to review NCUA Letter 12-CU-11 where the regulator discusses the written Interest Rate Risk Policy, Oversight and Management, Measuring and Monitoring, Internal Controls, and Management Decisions Based-On Interest Rate Risk Modeling.

Evaluating ALM Models

In addition to an awareness of the NCUA’s Interest Rate Risk Policy & Program, SunCorp would also like to suggest criteria a credit union may employ when evaluating ALM Models. The process of purchasing or selecting an external party for a validation report has now become a major undertaking as a result of all the embedded costs associated with ALM modeling programs. Therefore, a credit union's attention to a few due diligence steps in several key areas can speed up the process, help you make the right decision, and ensure you spend your precious budget dollars wisely. You should investigate the most common costs associated with any ALM model, such as:

The SunALM Solution

To effectively maintain and analyze your balance sheet, SunALM’s user-friendly web-based service provides detailed analysis to evaluate the impact of a specific asset or liability on your balance sheet. Review reports on-demand from your desktop, and perform real-time simulations to predict the effects of new products or rate and volume changes prior to making investment decisions. The flexibility of user-defined rate shocks provides analysis of risk in any potential market condition.

Changing ALM models can be a complex decision. Understanding the different costs involved in any model can help your credit union find a model that fits your needs and your budget. Technology has dramatically changed the way business is done in financial institutions. Newer ALM models, like SunALM, are Internet-driven models that can provide you with lower costs, greater efficiency, ease of use, and additional functionality.

On May 30th, Steve Browning from SunCorp will lead a discussion to determine whether your credit union is subject to the new NCUA Interest Rate Risk Policy and provide a detailed look at the common costs associated with an ALM model. Moreover, Steve will showcase SunALM, the user-friendly web based SunCorp ALM solution, along with its capabilities, and how the model can assist the credit union in complying with the NCUA’s Examiners’ Interest Rate Risk Questionnaire. Registration for the session is available from our Online Learning Center.

Additional Resources



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