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The NCUA has issued a Letter to Credit Unions that clarifies the agency's interest rate risk (IRR) supervisory framework and makes it more flexible. The agency stated that the changes to the IRR supervisory framework are intended to improve the “NCUA’s supervision of IRR in credit unions given current market conditions.”

Part of these changes apply to the NCUA’s NEV Supervisory Test (NEV Test), which measures a credit union's IRR exposure relative to its capital. During 2020 and 2021, many credit unions experienced significant share growth which continues to depress net worth ratios, followed by a rapid rise in benchmark interest rates in 2022.

As a result, many credit unions have recently seen or have been anticipating poorer NEV Test results than in prior years, despite a lack of other major changes in their underlying businesses. The NCUA’s IRR supervisory framework updates aim to reduce some of the negative impacts credit unions would have otherwise faced as a result of comparatively poorer NEV Test results.

Other primary changes to the framework include:

• revising the NEV’s Test risk classifications by eliminating the extreme risk classification and modifying the high risk classification;
• clarifying when a Document of Resolution (DOR) is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan;
• providing examiners more flexibility in assigning IRR supervisory risk ratings; and
• revising examination procedures to incorporate updated review steps when assessing a credit union’s management of IRR in a changing economic and interest rate environment. 

Of note, NAFCU met with the NCUA in July to discuss credit unions' IRR challenges and how the NCUA can help credit unions to better manage IRR in a rising rate environment. The association also shared the NCUA's ongoing work related to IRR in an insight post last month, underscoring NAFCU's request that the agency immediately raise the permissible interest rate ceiling, and specifically encouraging the agency to establish a floating permissible interest rate ceiling equal to a 15 percent spread over the prime rate.

NCUA will host a webinar on these updates, Thursday, September 15, at 2:30 p.m. Eastern. NCUA Chairman Todd Harper will provide opening remarks, and staff from the Office of Examination and Insurance will explain the updates and respond to questions from attendees.

Read the full announcement. NAFCU will continue to engage the NCUA to directly communicate the credit union industry’s feedback on the agency’s regulations, and keep credit unions up to date via NAFCU Today.