Matz encourages CUs to evaluate interest-rate risk
Interest rate risk of credit unions through the second quarter of 2013.
Oct. 23, 2013 – NCUA Board Chairman Debbie Matz’s column in this month’sNCUA Report calls on credit unions to evaluate their interest-rate risk plans now to mitigate any “new risks on the horizon.”
“Interest rates have recently started to rise,” she wrote in the newsletter’s Chairman’s Corner. “A rapid rise would rock the foundation of many credit unions’ balance sheets. Thousands of credit unions would realize negative earnings.”
Matz tells credit unions to look beyond their deposits and loan portfolios when addressing their interest rate risk and to consider the soundness of their third-party relationships, including with CUSOs and other credit unions.
NCUA rules require credit unions with more than $50 million in assets to have a plan to mitigate interest rate risk. These federally insured credit unions are required to have a written policy on interest-rate risk management and a program to implement it effectively. One measure used by the NCUA is the supervisory interest rate risk ratio. Those credit unions between $10 and $50 million in assets where the SIRRT ratio is greater than 100 percent are subject to this rule as well. NCUA’s formula for SIRRT is as follows:
First mortgage loans + investments > 5 years/net worth
Using this measure, interest rate risk stands at 270 percent of new worth in the second quarter of 2013 for the credit union industry as a whole, according to data collected by NAFCU.
“It is worth noting that credit unions have been steadily reducing the proportion of long-term real estate mortgages in their portfolios since the beginning of the real estate bust,” said NAFCU Chief Economist and Director of Research David Carrier. “Long-term real estate concentration for the credit union industry dropped to 158 percent of net worth in the second quarter of 2013; much lower than the 2008 peak where it stood at 196 percent of net worth. When measured this way, interest-rate risk is well below the SIRRT ratio.”
If a credit union is unsure of its interest rate risk, NAFCU’s CU Performance Benchmarkreport as well as NAFCU research staff, can help.
October NCUA Report
NAFCU CU Performance Benchmark report