(ALM) NCUA's Revised Interest Rate Risk Supervision

39 Pages·2016·1.85 MB·English

by  Joanne Moll

Asset/Liability Management (ALM)
NCUA’s Revised
Interest Rate Risk Supervision
(Letter to Credit Unions 16-CU-08)
Dan Frilot
Senior Vice President
Balance Sheet Solutions, LLC
Background
 Balance Sheet Solutions, LLC (BSS)
Founded in 2002 and is wholly owned by Alloya Corporate Federal Credit
Union. Our staff averages 26 years of experience in institutional financial
services and 13 years specifically working with and for credit unions. We
help over 800 credit unions in the U.S. with balance sheet strategy,
investment execution, and risk measurement.
 Dan Frilot, SVP - ALM Risk Management
Experience: Over 25 years in financial services industry, 20+ years
working directly with credit unions on balance sheet management
strategies including liquidity and funding, loan portfolio analytics and loan
participations, interest rate risk mitigation, and concentration risk.
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Agenda
 NCUA’s Letter to Credit Unions 16-CU-08
 Revised Interest Rate Risk (IRR) Supervision
 IRR Supervision Scope & Expectations
 Are Interest Rates Headed Higher?
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NCUA Letter to Credit Unions 16-CU-08
Revised Interest Rate Risk Supervision
 Development of the Net Economic Value (NEV)
Supervisory Test
 Updated IRR tolerance thresholds for NEV
 Interest Rate Risk Review Procedures Workbook
 Creation of Estimated NEV Tool for Small CU’s
 Revision of IRR Chapter in Examiner’s Guide
 Effective January 1, 2017
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NEV Supervisory Test – What Is It?
 Total balance sheet IRR metric
 Focus on capital at risk
 Creates uniform and consistent IRR NEV
measure across all credit unions
 Shifts regulatory focus towards IRR outliers
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Net Economic Value (NEV)
 The fair market value of assets minus the fair
market value of liabilities equals NEV.
 NEV includes only existing balances and
contracts as of the analysis date. NEV does
not include projected new volumes.
 Market-based measurement = NEV Ratio
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NEV Sensitivity
 Identify base case NEV at point in time
 If market interest rates rise or fall, what
happens to the amount of NEV (i.e. the
percentage change in NEV)?
 Percentage change in NEV = NEV Sensitivity
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NEV Supervisory Test – Mechanics
 Examiner will use credit union’s internally-derived
NEV information on assets, term share certificates,
and other liabilities.
 1% deposit premium benefit given to non-maturity
shares (NMS) in base case.
 4% benefit given to NMS (from new base) at +300
basis point rate shock scenario.
 NEV ratio and NEV sensitivity evaluated at +300
basis point rate shock scenario.
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NEV Supervisory Test – Why Developed?
 Large percentage (over 70%) of credit union funding
in non-maturity share balances.
 Significant uncertainty surrounding non-maturity
share valuation methods.
 Credit unions primarily use past behavior to predict
future behavior of non-maturity accounts.
 Technology has made it easier to shift money
between financial institutions. Historical deposit
regression analysis may no longer be accurate.
 Standardization will allow NCUA to compare risk
across the CU system.
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Average Share Balance Composition - All CUs Nationwide
$180
Share Certificates
$160
IRA/KEOGH Shares
Share Drafts
$140
Money Market
$120 Regular Shares Non-Maturity
Shares 81%
s$100 2Q16
n
o
i
l
li $80 Non-Maturity
M
Shares 65%
$60 4Q07
$40
$20
$0
Source: Callahan Peer-to-Peer
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