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Rate risk rule is 'overkill,' CUNA says

WASHINGTON (1/27/12)--New National Credit Union Administration (NCUA) interest rate risk (IRR) regulations are "regulatory overkill" and only increase "the already hefty regulatory burden on credit unions," Credit Union National Association (CUNA) President/CEO Bill Cheney said following Thursday's NCUA open board meeting.

The NCUA's IRR proposal,  presented to the three agency board members for consideration Thursday, is tailored "to apply to credit unions at most risk for interest rate shocks," agency staff  said. (CUNA Photo)
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The NCUA on Thursday unanimously approved amending its federal share insurance regulations to include a requirement that federally insured credit unions have both a written interest rate risk (IRR) policy and an effective interest rate risk management program. Under the proposal, the NCUA could withhold National Credit Union Share Insurance (NCUSIF) coverage of member accounts for credit unions that do not comply with the proposal.

The agency's IRR policy standard will not be "one-size-fits-all," NCUA Chairman Debbie Matz said, noting that the NCUA is providing flexibility for credit union managers and board members to develop their own policies, she added.

The NCUA said the final rule, which will become effective in early September, will not apply to credit unions with less than $10 million in assets. Federally insured credit unions with assets between $10 million and $50 million must have a written policy if first mortgage loans plus total investments longer than five years is equal to or greater than 100% of net worth, and federally insured credit unions holding more than $50 million in assets will need to fully comply with the new rule, the NCUA added.

The agency has estimated that 55% of all credit unions will be unaffected by the rule. However, CUNA noted, the 45% of credit unions that are subject to the rule account for more than 90% of all credit union members, meaning that the rule affects the vast majority of credit union operations.

NCUA officials at the Thursday meeting clarified that the guidance accompanying the rule would not be used by examiners as a compliance checklist, and said the agency does not intend to remove a credit union's NCUSIF coverage over this rule. Insurance coverage issues would only be addressed in "extreme" cases, NCUA Director of Examinations and Insurance Larry Fazio said.

"The agency still has not provided sufficient evidence that it is necessary for the rule to link compliance with its requirements for NCUSIF coverage," Cheney added.

Credit unions have increased their IRR exposure by more than 50% since 1995, and hold nearly 31% of their assets in long-term, fixed-rate mortgages, the NCUA said. This, when combined with the inevitable rise in interest rates, could lead to credit unions facing "far higher exposures to interest rate risk than banks" in the near future, the agency added. The NCUA has long provided guidance on IRR risk, but wanted to provide a more concrete rule to cite in cases where credit unions were taking on too much rate risk, agency staff said.

The NCUA is exploring allowing credit unions to hedge simple interest rate risks by investing in derivatives, and has asked for public comment on this possibility through an Advanced Notice of Proposed Rulemaking (ANPR).

Matz said "derivatives can be a useful tool for highly experienced professionals to manage interest rate risks," but also warned that some derivatives can be extremely volatile – and choosing the right rates to hedge at the right time can be a very risky proposition.

The ANPR was released for a 60-day comment period.

For more on the IRR and derivatives releases, use the resource link.
 
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