CUNA Regulatory Comment Call
December 27, 2001
STUDY OF THE VALUATION OF NON-MATURITY SHARES
(NOT A MAJOR RULE)
EXECUTIVE SUMMARY
- The NCUA Board is requesting comments on the results of a study of the valuation of non-maturity shares that was commissioned by NCUA. The study and the public comments will be used by NCUA as it considers further steps in this area, which may include further analysis and/or guidance for examiners on the appropriate treatment of these instruments in the assessment of interest rate risk.
- Non-maturity shares include share drafts, regular shares and money market share accounts, which may provide mitigation of interest rate risk to the extent that they are a stable, low cost source of funds.
- NCUA believes that the majority of credit unions would not be affected by the results of this study, either because the interest rate risk profile is limited, or because they treat shares at par value for interest rate risk measurement purposes.
Comments are due to NCUA by April 24, 2002. Please send your comments to CUNA by April 12, 2002. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.coma; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004. You may also contact us if you could like a copy of the request or you may access it by clicking here. You may obtain a copy of the study from CUNA or from the NCUA website at the following Internet address: http://www.ncua.gov/news/draftboardactions/BAM-01-12-13-6.pdf.
DESCRIPTION OF THE PROPOSAL/STUDY
NCUA commissioned the National Economic Research Associates (n/e/r/a) to conduct a study of methods to value non-maturity shares. The n/e/r/a study provides recommendations for the most suitable valuation approaches. The study proposes effective maturities that may reasonably be used for credit union shares in which the cash flows are not explicitly documented and modeled by the credit union. The study proposes a method to value these shares, and discusses the appropriate discount rate for these funds. Recommendations are also provided where credit unions analyze their cash flows from these shares. NCUA believes this study will be most relevant to those credit unions that assume non-maturity shares materially mitigate the risk of a high level of long-term assets.
The n/e/r/a study may be useful in evaluating net economic value (NEV) analysis. NEV analysis measures the potential effect of changes in interest rates on net economic value. NEV means the fair value of assets minus the fair value of liabilities. Valuation techniques used to estimate fair values require assumptions about maturities and interest rates to calculate the present value of cash flows of non-maturity shares. As with gap analysis and review income simulation models, NCUA examiners judge whether these assumptions are reasonable.
Some of the main conclusions reached in the n/e/r/a report are as follows:
- The appropriate discount rate for calculation of the present value of non-maturity shares is the rate on a comparable risk investment. Under the assumption of no credit risk, this is a Treasury rate.
- The chosen maturity should be a duration (a measure of interest rate risk). The following durations are recommended as the final (“effective”) maturities for credit unions that do not explicitly model non-maturity share cash flows:
| Min (Years) | Mid (Years) | Max (Years) | |
| Share Drafts (Transaction Accounts) |
2.0 | 2.5 | 2.8 |
| Regular Shares (Passbook) |
2.5 | 3.0 | 3.5 |
| NMDAs (Non-Maturity Share Assumptions) |
0.5 | 1.0 | 1.5 |
- If credit unions wish to use complex models, such as the Office of Thrift Supervision Net Portfolio Value Model (NPVM) and “contingent claims” models, the report advises:
- Model users and NCUA examiners should understand the assumptions on which the model is based;
- Model parameters should be estimated with individual credit union data, or lacking that, with aggregate credit union data adjusted to conform to the no-growth assumption in the NEV framework; and
- The discount rate in the model should be chosen based on the assumed default risk of the deposits being valued.
- Option-adjusted spread (OAS) models are generally not appropriate for credit unions.
- NCUA should put in place some simple procedures that will lead to ongoing estimates of the retention rates of non-maturity shares and commission a study to examine past deposit behavior compared to that of banks and thrifts.
- Generally, simpler methods are appropriate and cost-effective for smaller credit unions, while the more sophisticated methods are advised for the larger and more financially sophisticated credit unions.
QUESTIONS ON THE PROPOSAL/STUDY
- Please provide specific comments on the study. If there are points with which you disagree or you believe are incorrect,
please provide both the specific citations in the study and the support for your conclusion.
- NCUA is considering establishing a “safe harbor” for non-maturity share assumptions, such as a maturity of 1 year for money
market shares, 3.0 years for regular shares, and 2.5 years for share drafts. Examiners would judge these, or shorter, terms to be
acceptable maturity assumptions for non-maturity shares. Do you think this approach is reasonable?
Yes ______ No ______
Why or why not?
- The characteristics of a non-maturity account, not its labeling, are important determinants of value. For example, two
credit unions may have accounts labeled regular shares: the first credit union may rarely change the interest rate; in contrast,
the second may reset the rate frequently, similar to a money market share account at the first credit union. What documentation,
if any, would be appropriate to use “safe harbor” assumptions?
- A credit union might choose to use its own empirical analysis to demonstrate a risk mitigation value larger than a “safe
harbor” assumption. NCUA examiners would expect a statistically valid empirical analysis to justify such values. Should NCUA
use the validation guidelines addressed in Chapter VIII of the report?
Yes ______ No ______
If not, please provide alternative guidelines you believe are appropriate and provide the specific evidence to support your recommendation.
- Is there background information from sources other than those covered in the n/e/r/a study that NCUA should consider?
Yes ______ No ______
If so, please indicate the source of the information and the results. If possible, please provide complete copies of the studies or the analysis.
- NCUA is contemplating whether to conduct an empirical study of credit union non-maturity share behavior. Please provide
specific recommendations on what should be included in such a study.
- Are there other considerations in the valuation of shares, beyond those discussed in the n/e/r/a study, which should be
taken into account?
Yes ______ No ______
If yes, what are the other considerations?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
