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Jan 12, 2010
Categories: Operations

Interest Rate Risk Management

Posted by Anthony Demangone


Last week, NCUA joined other regulators in issuing guidance on interest rate risk management.   Here's a snippet:

Current financial market and economic conditions present significant risk management challenges to institutions of all sizes. For a number of institutions, increased loan losses and sharp declines in the values of some securities portfolios are placing downward pressure on capital and earnings. In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution’s capital and earnings.

The regulators recognize that some degree of IRR is inherent in the business of banking. At the same time, however, institutions2 are expected to have sound risk management practices in place to measure, monitor, and control IRR exposures. Accordingly, each of the financial regulators have established guidance on the topic of IRR management (see Appendix A). Although the specific guidance issued and the oversight and surveillance mechanisms used by the regulators may differ, supervisory expectations for sound IRR management are broadly consistent. The regulators expect all institutions to manage their IRR exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile, and scope of operations. Effective IRR management processes are particularly important for those institutions experiencing downward pressure on earnings and capital due to lower credit quality and market illiquidity. (Emphasis added.)


Now, why did I share interest rate risk management with you, my compliance peeps?  Here's why.

  • I believe a good compliance officer is the perfect person to alert the credit union when new guidance is issued from NCUA.  Granted, this may ultimately be the responsibility of your CFO.  If so, forward this to him or her.  
  • Compliance risk is only one of seven risks outlined by NCUA.  A good compliance officer takes a holistic view of things.  Actions may affect one, two more more risks at the same time.  If you can spot the risks in proposals, strategic plans, etc., you'll increase your worth to your credit union.  And what are those risks?Compliance, strategic, interest rate, liquidity, reputation, transactional,  and credit.  Read the first chapter of the NCUA examiner's guide for a nice overview of risk management through the eyes of NCUA.    
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Last week, I pointed out that a third party has a solution for the Reg Z/CARD Act requirement to provide a toll-free number on periodic statements to provide information about approved credit counselors, as outlined in the reg.  (Now, that was a sentence that only an attorney could write.) I certainly wasn't trying to imply that there was only one vendor in this area.  Here's another vendor that offers a solution.  As always, do your own due diligence when deciding how to proceed.  And I'm guessing that there are probably others that offer such a solution.  If you work for another vendor who offers one, bully for you.  But this will be my last post on this specific issue.

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