Friday, May 18, 2012

Interest Rate Risk

In a letter to federally-insured credit unions, NCUA wrote that beginning September 30, 2012 certain credit unions will be required to adopt a written policy on interest-rate risk (IRR) management and a program to implement it effectively.

The rule will apply to all credit unions with assets in excess of $50 million or credit unions with assets equal to or greater than $10 million but do not exceed $50 million and the sum of first mortgage loans held and investments with maturities exceeding five years is equal to or greater than 100 percent of the credit union's net worth at quarter end.

While this interest-rate risk rule only applies to federally-insured credit unions, I assume that it will trickle down to privately-insured credit unions. So, the following discussion includes both privately-insured and federally-insured credit unions.

As of December 2011, there were 2,235 credit unions with assets in excess of $50 million. Additionally, 1,067 credit unions with between $10 million in assets and $50 million in assets will need to comply with this rule.

There were 448 credit unions with more than $50 million in assets that did not exceed the Supervisory Interest Rate Risk Threshhold of more than 100 percent of their net worth in first mortgages and investments with maturities in excess of 5 years.

Among all credit unions subject to the final rule, the average ratio of first mortgages plus long term investments to net worth was 275 percent of net worth, while the median ratio was 207 percent of net worth.

However, some credit unions have significant exposure to first mortgages and long term investments. There were 20 credit unions at the end of 2011 that reported holding more than 10 times their net worth in first mortgages and investments with maturites over 5 years. But it should be noted that 19 of these 20 credit unions were undercapitalized. Several of these credit unions have either failed or been acquired.

An additional 170 credit unions have between 5 and 10 times their net worth in first mortgages and investments with maturities in excess of 5 years.

On average, the larger the credit union the greater the exposure of their net worth to long-term investments and first mortgages. Credit unions with over $1 billion in assets reported an average ratio of 315 percent. Credit unions with assets between $500 million and $1 billion in assets had a ratio of 293 percent. Credit unions with assets under $500 million but greater than $100 million reported an average ratio of 269 percent. The average ratio was 195 percent for credit unions with between $50 million and $100 million in assets,


  1. Another great idea brought to you by the good folks at the NCUA. How the heck have credit unions' been able to manage this Interest Rate Risk (IRR) without NCUA's latest written policy requirement? Now the NCUA has provided its credit unions with a clear sense of direction with yet another written policy requirement. Soon the NCUA will have a written policy requirement for turning the lights on and a separate written policy requirement for turning the lights off. The NCUA is the greatest risk to credit unions. Will someone please turn the lights off at the NCUA?

  2. Couple of items - I think your "2.69 percent" is a typo ,and probably needs to be 269%.

    Also, would it be better to drop out those RE loans repricing within 5 years? Some of us have a good amount of 5 and 7 year balloon as taking 30 years and putting it on the books now is nuts.



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