NAFCU Compliance Blog

A Brief Preview of NCUA’s New Interest Rate Risk Supervisory Tool

Written by Michael Emancipator, Senior Regulatory Affairs Counsel

In a webcast last Thursday, August 18, NCUA’s Office of Examination and Insurance (E&I) provided a background and overview of its upcoming interest rate risk (IRR) supervisory tool. NCUA stated that the IRR tool and guidance is expected to be published in the next few months, with official use during examinations no earlier than January 2017. While we were pleased to see that NCUA did not include an IRR component in RBC2, many experts have been paying close attention over the last several months to this issue for the impact of IRR supervisory guidance on credit unions. We will keep members posted once the agency releases the full tool and guidance, but in the meantime, we wanted to share a few high-level components from this E&I webcast to give you a better sense of what to expect.

First, the agency stated that the goals of the new tool include: improving the clarity of guidance, consolidating and unifying the guidance, reducing inconsistency of examiner interpretation, and instituting means through which NCUA can collect uniform and comparable IRR information across the industry to better identify “outliers.”

The agency also asserted this change will result in a number of benefits for credit unions. For example, NCUA claimed that the new tool will enable it to better focus on the risk outliers, and thereby reduce focus on lower risk institutions. Additionally, by creating a risk-based scope for IRR, NCUA hopes to gain savings in the time spent on IRR reviews and increase the agency’s ability to determine where it needs to send specialized staff.

So how will the new tool work? NCUA explained that the new IRR supervisory exam will utilize a risk-based scoping approach, the result of which will drive whether there is an increase or decrease in the number of required review steps, which also depends on the credit union’s asset size, as seen in the figure below.

The risk categories used for the scoping are tiered based on the levels of post-shock net economic value (NEV) ratios and the NEV change sensitivities. These classifications are designated as low, moderate, high, and extreme, and they serve as the primary guidepost for the overall IRR supervisory rating. The risk tolerance thresholds that NCUA will use to assign a supervisory risk rating to a credit union's IRR is found on a traditional NEV plus or minus 300 basis point shock test approach. In order to evaluate the level of market risk in a balance sheet, NCUA will first review the credit union's current base case and shock NEV levels, and then assess both the absolute level of the post-shock NEV ratio, as well as the total percentage change of NEV from the base to shock scenarios. Both thresholds apply, so either measure triggers the assigned risk level.

NEV is a capital-at-risk measure that identifies potential threats of a longer term nature that could adversely impact levels of net worth. It is a total balance sheet measure that takes into account both sides of the balance sheet, and thus includes potentially mitigating benefits from offsetting exposures. NCUA explained that NEV is already widely used by credit unions as a standard form of risk management and is used by virtually all credit unions in their internal ALM modeling. NCUA examiners will use that internal NEV information as the input values for assets and liabilities in its supervisory test model.

Finally, the webinar also briefly touched on how these IRR supervision changes relate to the CAMEL rating system. Currently, NCUA assigns a supervisory risk rating to IRR as part of the “L” rating of CAMEL. NCUA proposes to continue this approach for the immediate future until the Board decides it wants to move forward with an ‘S.’

Importantly, though, NCUA has determined that adding ‘S’ to CAMEL will require NCUA to reprogram numerous internal systems, and that a number of existing documents in supervision programs would require revisions. This means that if the Board wanted to adopt “S,” any such implementation would take several years.

NCUA Board Meeting; NCUA-SBA Partnership; February NCUA Report

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA Board Meeting. Last week, the NCUA Board held its February open meeting. The following two agenda items were approved 3-0:

1. ​Proposed IRPS 15-1 and Proposed Rule, Part 791.8(a) of NCUA’s Rules and Regulations, Regulatory Flexibility Act Definition of Small Entity for Consideration of Regulatory Relief.
2. Taunton Federal Credit Union (Taunton, MA), Request to Expand Community Charter.

With regard to the first item, The NCUA Board approved a proposed rule that would revise the “small entity” designation under the Regulatory Flexibility Act by increasing the defining threshold to include federally insured credit unions with less than $100 million in assets. The current rule imposes a $50 million threshold. Comments on NCUA’s proposed rule and IRPS 15-1 will be due to the agency 60 days after publication in the Federal Register. NAFCU is preparing a Regulatory Alert for members, which will be available here.

The NCUA Board was also briefed on the agency’s ongoing field-of-membership working group. NCUA staff advised that the working group, which is comprised of internal NCUA staff, has inventoried the issues that need to be addressed as: (1) procedural; (2) regulatory; and (3) legislative. The procedural and regulatory issues will be presented to the NCUA Board for its action. NCUA staff also explained that the working group will begin reaching out to credit union stakeholders next month for their input. NAFCU has been working closely with the agency to include our members on the working group.

Finally, the NCUA Board was briefed about the state of the National Credit Union Share Insurance Fund (NCUSIF).

NCUA’s Board Action Bulletin is available here.

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NCUA-SBA Partnership. Earlier this month, NCUA announced a partnership with the Small Business Administration (SBA) for a series of educational initiatives during the next three years aimed at helping small businesses connect with their local credit unions for better access to capital.

The first initiative of the new partnership will be a joint webinar entitled “Balancing Member Business Loan Portfolios with SBA Guarantees,” on March 4, 2015, at 2 p.m. Eastern.  Registration is available here.  Participants can submit questions in advance via email at [email protected], and should include the subject line “SBA Guarantees Webinar.”

Last week, NCUA also announced a new “Small Business Lending Resource Center” webpage designed to provide information about NCUA’s member business lending rules, supervisory guidance, links to the SBA’s loan programs, and other resources.

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February NCUA Report. NCUA also recently released its February 2014 Report. One article in particular caught my eye – the Region V Report: Consider an Asset-Liability Management Committee to Help with Interest Rate Risk. The article discusses some of the reasons NCUA thinks credit unions should consider using an Asset Liability Management (ALM) Committee to review interest rate exposure. From the article:

“While not required in NCUA’s regulations, our experience has shown that a committee like this can be a useful best practice for credit unions with a concentration of mortgage-related investments and loans.

An Asset-Liability Management Committee oversees the board-approved asset and liability management policy for the credit union. These committees are staffed by members of the credit union’s board and staff from across a credit union’s business lines. The committee evaluates and monitors all of the variables that could affect a credit union’s interest rate risk position, such as its internal controls, cash flows, maturity schedules, and how it implements its risk-management policies.”

The article includes links to various guidance documents on managing interest rate risk (IRR), and is available in its entirety here.  Speaking of IRR, my colleague JiJi recently blogged about NCUA’s IRR rule, currently available guidance, and what may be coming down the pike.

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NAFCU Webcast. Regulation Z: Five Challenges and Their Solutions – The Truth in Lending Act (TILA), as implemented by Regulation Z, is the oldest federal consumer credit law. While it's important to stay up-to-date on the latest changes, it's just as important not to overlook some of its fundamental principles.  Register here for this NAFCU webcast for a refresher on five core issues that arise across product types and how to address them. You'll gain a greater understanding of: what is and is not a finance charge, Regulation Z's rules for calculating annual percentage rates, how to satisfy Regulation Z's advertising requirements, the difficulties that can arise when disclosing variable rates, and how to meet the operational challenge of ensuring that Regulation Z disclosures are correctly completed.

Interest Rate Risk Now and a Look Ahead

Written by JiJi Bahhur, Director of Regulatory Compliance

Although there hasn’t been any new guidance or final ruling on interest rate risk (IRR) as of late, it has been one of the National Credit Union Administration’s (NCUA’s) focuses for the past two years.  Because it is on NCUA’s radar, I’d like to highlight the following today:

• NCUA’s 2015 Supervisory Focus on IRR;
• NCUA’s IRR Rule and Guidance that is currently available;
• What may come in the near future on IRR; and
• A call to you to share your credit union’s recent experiences with IRR.

Supervisory Focus

Like 2014, interest rate risk (IRR) remains high on NCUA’s list of supervisory priorities for 2015.  While most credit unions have managed through interest rate hikes in the past, according to NCUA some credit unions "may not be as well positioned this year due to higher concentrations of net long-term assets and unrealized losses."  Thus, in 2015, NCUA examiners will continue to use existing guidance to assess credit unions' interest rate risk exposure. NCUA Letter to Credit Unions 15-CU-01 also mentions that the agency is in the process of updating this guidance to ensure that IRR is assessed accurately and that the appropriate supervisory steps are taken in response to excessive IRR exposure. 

In addition, compliance with NCUA’s Interest Rate Risk Rule (12 C.F.R. § 741.3(b)(5)) will be assessed by examiners as well. 

Current Rule(s) and Guidance on IRR

Section 741.3(b)(5) of NCUA’s regulation requires credit unions with assets over $50 million, as measured by the most recent Call Report filing, to draft and implement a written IRR policy and develop a program to identify, measure, monitor and control IRR.  Appendix B to Part 741 provides detailed guidance on how to develop an IRR policy and an effective IRR program, including best practices for managing IRR.  Given the differences among credit unions (e.g., operations, complexity, risk exposure, size), each credit union should use the guidance in Appendix B to formulate a policy that embodies its own practices, metrics and benchmarks appropriate to its operations. Further, the credit union's board of directors is responsible for ensuring the IRR policy is adequate, which includes a periodic review of the credit union's IRR exposure and compliance with the policy and risk limits.

Some additional NCUA guidance is listed below:

• NCUA Letter to Credit Unions 12-CU-05, "Interest Rate Risk Policy and Program Requirements;"
• NCUA Letter to Credit Unions 12-CU-11, "Interest Rate Risk Policy and Program Frequently Asked Questions;" and
• NCUA Letter to Credit Unions 10-CU-06, "Interagency Advisory on Interest Rate Risk Management."

NCUA’s IRR guidance and rule requirements are also posted on its Interest Rate Risk Resources webpage.

The Future of IRR

With the release of the second risk-based capital proposal (RBC2), the revised proposal made a number of changes from the original 2014 RBC proposal, including the removal of interest rate risk.  Therefore, in addition to updating existing guidance on IRR, NCUA has also stated that it intends to promulgate a separate rulemaking on IRR in the future.  The agency indicated, however, that it does not intend to issue an IRR proposal until sometime after the RBC2 comment period closes.

For more information on the RBC2 proposal, follow our RBC blog series here.  Also, NAFCU’s Regulatory Affairs team has provided a Regulatory Alert to further assist with the proposed requirements of RBC2.

Call to Share Experiences

NAFCU would like to hear from you.  Given that IRR has been one of NCUA’s top supervisory focuses for the past two years, I’m sure many of you have experiences with IRR.  The agency’s attention to IRR has also been one of NAFCU’s top priorities as well, but to be true advocates for our members, we need your feedback and perspectives.  Please send your input to NAFCU’s Director of Regulatory Affairs, Alicia Nealon, at [email protected]. 

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Weekend Fun.  On a lighter note, I just had to share the newest pictures of the kids on a playdate with their cousin.  Nothing like some chicken nuggets, cartoons, and toys!

NCUA Supervisory Focus for 2015; Consumer Compliance Outlook; Last Day for Holiday Savings

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA Supervisory Focus for 2015. NCUA recently released Letter to Credit Unions 15-CU-01, detailing the agency’s supervisory priorities for 2015. Areas of focus include cybersecurity, interest rate risk, Bank Secrecy Act compliance, and compliance with new regulations – NCUA’s liquidity rule, the CFPB’s Ability-to-Repay and Qualified Mortgage rule, and the CFPB’s TILA/RESPA Integrated Disclosure rule (after the rule goes into effect on August 1, 2015), are specifically mentioned.

In the area of cybersecurity, the focus is on proactive measures to protect data and members, as well as the ability to respond in the event of a breach. From the letter:

“NCUA field staff will focus on proactive measures credit unions can take to protect their data and their members, including:

• encrypting sensitive data;
• developing a comprehensive information security policy;
• performing due diligence over third parties that handle credit union data;
• monitoring cybersecurity risk exposure;
• monitoring transactions, and
• testing security measures.

Field staff will also be evaluating credit unions’ capacity to recover and resume operations in the event a security breach does occur. Appendix B to NCUA Rules and Regulations Part 748 provides guidance on developing an incident response program that can help a credit union react to a breach. These programs can help the credit union assess the nature and scope of an incident, determine when to contact law enforcement and notify members, and take steps to safely resume operations.

Credit union officials are also encouraged to review the online cybersecurity resources posted by NCUA and the FFIEC’s Cybersecurity and Critical Infrastructure Working Group to promote cybersecurity throughout the financial services industry.”

In the letter, NCUA also indicates that it is continuing to monitor trends in credit unions’ loan portfolios, and that it is streamlining exams for credit unions with assets up to $50 million and CAMEL ratings of 1, 2, or 3. For complete details, the letter is available in its entirety here.

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Consumer Compliance Outlook. The Fourth Quarter 2014 issue of the Federal Reserve’s Consumer Compliance Outlook is now available.  One of the articles, entitled “Managing Compliance Risk Through Consumer Compliance Risk Assessments,” discusses the use of consumer compliance risk assessments in identifying, measuring, monitoring, and managing consumer compliance risks associated with products and services.  Although geared towards institutions subject to the Federal Reserve Board’s Community Bank Risk-Focused Consumer Compliance Supervision Program, the article is a good read.

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February 2014 NCUA Report; Interest Rate Risk; NCUA Economic Update

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Recently, the NCUA released its February 2014 report. Featured articles include:

Office of Examination and Insurance Report: Riskier Credit Unions will Need More Capital Under Proposed Capital Adequacy Rule

Chairman’s Corner: Exams are a Two-Way Street

Office of Consumer Protection Report: Get Ready. Military and America Saves Week is Feb. 24 – March 1

Board Perspectives:  Teddy, Moses and Buford; It’s Never too Early to Stop Being Late

Board Actions: Final Derivatives Rule Approved; Board Also Approves NCUA Strategic Plan for 2014-2017; Renews Interest Cap

Office of the Chief Economist Report: Long-Term Investments Resulting in Increased Supervisory Actions

Region III Report: Frequently Asked Questions About Mergers

Office of Examination and Insurance Report: Get a Better Understanding of NCUA’s Capital Adequacy Rule with Our Online Calculator

OSCUI Workshop and CEO Bootcamp Schedule

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Interest Rate Risk. Interest rate risk is a top supervisory focus for NCUA in 2014, as noted in Letter to Credit Unions 14-CU-02.  Along these lines, the article in NCUA's February 2014 report from the Office of the Chief Economist, Long-Term Investments Resulting in Increased Supervisory Actions, notes that supervisory action has been necessary in some “outlier” cases, and cautions credit unions in managing their interest rate risk.  From the report:

“For credit unions, investments are primarily meant to be safe places to store excess liquid funds. Once liquidity objectives are satisfied, investments also serve as a source of additional income to augment core earnings. The recent shift toward longer-term investments may indicate a trend away from liquidity management toward yield by taking on more risk.

‘The concern is that credit unions are reaching for yield in order to supplement earnings,’ NCUA Chief Economist John Worth said. ‘It is an understandable response, given the compression of net-interest margins in the low-rate environment. But the nature of the interest-rate environment, along with credit unions reaching for yield, has the potential to create a perfect storm that could have a substantial drag on future earnings, and make some credit unions insolvent.’ The pace of these portfolio changes has Worth and Cole concerned that credit unions are increasingly ignoring the perils of interest-rate risk in order to meet current earnings objectives. In the past year alone, while total investments have remained at 28 percent of assets, investments with maturities of less than three years dropped 11 percent or $20 billion, while investments with maturities of more than three years rose 33 percent or $30 billion.

[…]

The current interest rate environment—with short-term rates near zero and long-term rates at historic lows—is unprecedented. As a regulator, NCUA does not have a specific view on interest rates. Instead, NCUA believes credit unions’ balance sheets should be resilient in a wide variety of rate environments.

However, given the unusually low current interest rates and the recent improvements in the economy, there is much evidence to suggest that a transition to a rising and more volatile interest rate environment is already underway. Therefore, especially in the near term, credit unions should pay particular attention to their exposure to rising rates.

NCUA strongly urges credit unions not to forsake the role of liquidity in investment-portfolio management or to ignore interest rate-risk implications if they invest in higher-risk instruments to maximize current income.”

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NCUA Economic Update Video.   Last week, NCUA released its latest economic update video. In addition to reiterating interest rate risk concerns, the video discusses the labor market and consumer spending. The video is available on NCUA’s YouTube channel here.

What's the Deal with Derivatives?

Written by Brandy Bruyere, Regulatory Compliance Counsel

After gathering comments in the rulemaking process and a lengthy pilot program, the NCUA Board finalized the derivatives rule in January. This rule allows qualified credit unions to trade in certain derivatives for the purpose of mitigating (i.e. “hedging”) interest rate risk (IRR). The rule is complex, so this blog post will only provide a very broad overview of the rule in terms of what is a derivative, which credit unions can trade in them, and how a credit union can receive approval to trade.

First, what is a derivative? NCUA defines a “derivative” as:

“…a financial contract which derives its value from the value and performance of some other  underlying financial instrument or variable, such as an index or interest rate.”

It is also helpful to remember that “derivative” is a catch-all term used to describe several kinds of contracts such as futures, options, and swaps. For a more detailed discussion of derivatives, check out this NAFCU blog post.

While the derivatives world can include many “exotic” instruments, NCUA limited credit unions to a handful of products:

• Interest rate swaps
• Basis swaps
• Interest rate caps
• Interest rate floors
• U.S. Treasury note futures

NCUA further limited credit unions’ use of derivatives by requiring that these derivatives have particular characteristics. For example, the derivatives must serve the purpose of mitigating IRR. Also, the maximum maturity for most derivatives is fifteen years (ten years for U.S. Treasury note futures). Credit unions also cannot invest in collective investment funds that invest in derivatives that are purely speculative—meaning, the derivatives do not hedge any real-world risk.

Second, which credit unions can trade in derivatives? In order to be eligible to use derivatives, a credit union must have at least $250 million in assets and its most recent CAMEL rating must be 1, 2, or 3, with a management component of 1 or 2. Credit unions who do not meet these two requirements but would like to utilize derivatives may request permission from their field director.

Third, how does a credit union receive permission from NCUA to mitigate IRR with derivatives? The rule sets forth a two-step process:

    1.    The credit union must create an IRR mitigation plan and submit the plan to NCUA. Key components of this plan include:

• An explanation of how derivatives fit into the credit union’s IRR plan, including demonstrating a need for derivatives and a justification and statement of use for each derivative product the credit union plans to use;
• A discussion of the credit union’s capacity to manage derivatives and how it plans to acquire the resources required by the regulations such as experienced staff, proper management and internal controls, a legal review, and the necessary policies and procedures.

    2.    After receiving the IRR mitigation plan, NCUA will evaluate the credit union on its actual readiness to trade in derivatives based on the credit union’s personnel, controls and systems in place. Credit unions that are new to derivatives and approved must operate safely for one year under “limited authority” before NCUA will grant full trading authority.

The rules are rather complex and address ongoing regulatory requirements such as limits on the amount of derivatives contracts a credit union can hold and penalties for rule violations. Also, in a move urged by NAFCU, NCUA removed the “pay to play” provision which appeared in the original rule and would have charged credit unions fees to use derivatives. NAFCU members can expect a Final Regulation from NAFCU sometime soon which will provide further details about this rule.

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Winter Weather—With snow in the South and the polar vortexes freezing out much of the country, January was a crazy month for weather. This became a problem for our dog and his “morning ritual.” I would open my back door and he would glare at me, offended that I would ask him to go outdoors in a -8 degree wind-chill. This became a battle of wills, because while mastiffs are generally gentle and loveable, they have quite the stubborn streak. So, we compromised with our spoiled dog:

NCUA’s Supervisory Focus for 2014; NCUA Webinar on Exam Modernization

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA’s Supervisory Focus for 2014.  Last Friday, NCUA released Letter 14-CU-02, detailing its 2014 examination focus. For 2014, the emphasis is heavy on risk mitigation. From the letter – “In 2014, NCUA will be working to ensure that credit unions identify and mitigate forward-looking risks before they threaten the viability of credit unions and the stability of the Share Insurance Fund.” (My emphasis.)

Specific areas of supervisory focus for 2014 include:

• Interest Rate Risk
• Cybersecurity Threats
• Money Services Businesses (MSBs)
• Private Student Lending

In addition to these specific areas of focus, the letter highlights compliance with new rules.  NCUA also says it will be looking to reallocate resources “more efficiently and effectively” and describes several steps NCUA will be taking in 2014, intended to improve and streamline the exam process – let’s hope so!

The information in this letter is invaluable for exam preparation this year, so be sure to give it a read, available here.

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NCUA Webinar on Exam Modernization. This month, NCUA will be hosting a free webinar on its new examination report process. The webinar will provide an overview of the changes NCUA has made to streamline and improve the consistency of the examination report process, and give participants an opportunity to get a better understanding of the new procedures related to Documents of Resolution and the examination report.

This free webinar will be held on Wednesday, January 22, 2014, at 2 p.m. EST. Register here.

Participants may submit questions in advance at [email protected]. The subject line of the email should read “Examination Modernization Webinar.”

NCUA's Derivatives Proposal; Can't Help Myself

Written By JiJi Bahhur, Regulatory Compliance Counsel

Today, the NCUA Board issued a proposed rule to provide qualified credit unions limited authority to engage in derivatives activities for purposes of mitigating against interest rate risk (IRR). But, the proposal establishes a “pay-to-play” regulatory scheme for credit unions that are permitted to engage in derivatives activities. I’ll get into that in a moment. 

First, I should probably give some background on what derivatives are and what NCUA is proposing. NCUA has created a Q&A document addressing this, among other things.  From the Q&A document:

“Q.1: What are derivatives? What kinds of derivatives is NCUA proposing to allow for credit unions?

The Commodities Futures Trading Commission (CFTC) broadly defines a derivative as: “A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., “derived from”) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They can be used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps.”

While the term “derivatives” covers a broad spectrum of financial instruments in today’s market, NCUA is only recommending authorizing the use of plain-vanilla, US Dollar-denominated (USD) interest rate swaps and purchased-only interest rate caps. These instruments are widely transacted in today’s capital markets, have deep and transparent pricing and afford end users with strong liquidity and execution. The Bank for International Settlements reports that interest rate swaps are the largest component of the global over-the-counter (OTC) derivatives market.

With regard to interest rate swaps, the NCUA Board is proposing to authorize only standard “pay-fixed/receive-floating” and “pay-floating/receive-fixed” interest rate swaps. It is currently anticipated that most interest rate swaps users would enter into “pay-fixed/receive-floating” transactions to hedge against rising interest rates. This “plain vanilla” interest rate swap affords some protection against the most common interest rate exposure experienced by credit unions with material interest-rate risk (IRR) sensitivity—namely, a balance sheet with an asset portfolio that does not reset to external rate changes as quickly as its liabilities. Most credit unions use non-maturity and other short-term shares to fund longer duration assets, creating an inherent re-pricing mismatch for which pay-fixed/receive-floating interest rate swaps can provide some effective mitigation.”

Eligible credit unions seeking derivatives authority must submit an application for one of two levels of authority.  Level I authority contains more stringent limits, including limits to the notional value of interest rate swaps, aggregate book value of interest rate caps, combined limit of interest rate swaps and caps, and the maximum weighted average life of all derivatives transactions cannot exceed 5 years.  Level II authority has fewer limits, but credit unions that seek Level II authority must show why the Level I limits are not adequate to meet their IRR mitigation needs.

So what’s the catch? You have to “pay-to-play.”  The proposed rule calls for application fees and pretty hefty ones at that.  Level I application processing costs would range from $25,000 to $50,000 and Level II applications would range from $75,000 to $125,000.  If that’s not bad enough, there is an associated fee for every year after that. 

NAFCU has long advocated for expanded investment authorities for credit unions, but the "pay-to-play" proposal raises concerns as this would be the first time “pay-to-play” will be required in the credit union industry. 

The proposal can be accessed here.  NCUA’s Q&A document – which provides an understanding of the rule’s intent and the main contents – can be accessed here.  Also, NAFCU’s Regulatory Affairs team is in the process of drafting a Regulatory Alert (NAFCU Member Log-In required) on this proposal so keep your eyes peeled for that. 

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I just had to share these pictures with you all.  Have a great weekend.

FASB Publishes Proposal for Disclosing Liquidity and Interest Rate Risk

Written By JiJi Bahhur, Regulatory Compliance Counsel

In a recent News Release, the Financial Accounting Standards Board (FASB) announced its proposed Accounting Standards Update (ASU), intended to improve financial reporting about certain risks inherent in financial instruments.  The stated purpose of the proposed guidance is to help users of financial statements better understand organizations’ exposures to risks and the ways in which those risks are managed.  Those affected by the proposal have until September 25, 2012, to comment on the matter. 

The purpose of the Update is to address concerns regarding how an organization discloses their exposure to risks related to items such as financial assets, liabilities, obligations, and other financial instruments.  To address these concerns, the ASU proposed new disclosures related to liquidity risk and interest rate risk.  Specifically:

• The proposed liquidity risk disclosures would apply to all public, private, and not-for-profit organizations, but the nature of the disclosures would be dependent on whether the reporting organization is considered a financial institution.  The disclosures are intended to provide information on the risks that will be encountered by the reporting organization when meeting its financial obligations. 

• The proposed interest rate risk disclosures would apply only to financial institutions.  The disclosures are intended to provide information about the exposure of financial assets and liabilities to fluctuations in market interest rates. 

The News Release does an excellent job breaking down the proposed amendments to the two disclosures. 

         “The amendments in the proposed ASU on liquidity risk disclosures would require:

• A financial institution to disclose the carrying amounts of classes of financial assets and financial liabilities in a table, segregated by their expected maturities, including off-balance-sheet financial commitments and obligations.

• A financial institution that is also a depository institution to disclose information about its time deposit liabilities, including the cost of funding in a table or list during the previous four fiscal quarters.

• An organization that is not a financial institution to disclose its expected cash flow obligations in a table, segregated by their expected maturities, without being required to include the reporting organization’s financial assets in that table.

• All reporting organizations to provide their available liquid funds in a table, which includes unencumbered cash, high-quality liquid assets, and borrowing availability.

• All reporting organizations to provide additional quantitative or narrative disclosure of the organization’s exposure to liquidity risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period.

        The amendments in the proposed ASU on interest rate risk disclosures would require a financial institution to disclose:

• The carrying amounts of classes of financial assets and financial liabilities according to time intervals based on the contractual repricing of the financial instruments.

• An interest rate sensitivity table that presents the effects on net income and shareholders’ equity of hypothetical, instantaneous shifts of interest rate curves.

• Quantitative or narrative disclosures of the organization’s exposure to interest rate risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period.”   

For a full read of the proposed ASU, go here.  An effective date for this proposed guidance has not been issued at this time. 

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NAFCU Members.  NAFCU's Regulatory Affairs Team is in the process of drafting a Regulatory Alert on FASB's proposed Accounting Standards Update.  Once it is available, you can find it here. 

Guidance on Interest Rate Risk Requirements; Hearing on Regulatory Burden

Written by Steve Van Beek

Apologies for the later than usual posting today.  We had some unexpected technical issues.  

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Yesterday, NCUA issued Letter to Credit Unions 12-CU-05 which provides an overview of their Interest Rate Risk regulation (12 CFR 741.3(b)(5)).  The requirements are effective September 30, 2012.

The Letter to Credit Unions addresses frequently asked questions since the rule was finalized in January.  The Letter also includes the Examination Questionnaire that has been provided to NCUA examiners.    

Below is the first FAQ:

"Is your credit union subject to the new requirements?

You are subject to the requirements of the final rule if:

• Your credit union’s assets exceed $50 million, as shown by your most recent Call Report filing; or
• Your credit union’s assets are equal to or greater than $10 million but do not exceed $50 million and the sum of your first mortgage loans held and investments with maturities exceeding five years is equal to or greater than 100% of your net worth at quarter end.

Otherwise, you are not subject to the rule requirements. We are mindful of the need to avoid unjustified regulatory burden. We recognize past efforts to develop sound IRR policy and believe many FICUs already meet the rule requirements.

To promote transparency and facilitate implementation for FICUs with higher IRR exposure, we included comprehensive guidance on developing an IRR policy and an effective IRR management program in an appendix to the rule. This guidance describes widely accepted sound practices in IRR management and prior supervisory guidance such as the FFIEC Advisory on Interest Rate Risk Management discussed in NCUA Letter to Credit Unions 10-CU-06 (May 2010)."

NAFCU Webcast.  We have a May 24th webcast which will feature NCUA speakers taking A Detailed Look at NCUA's Interest Rate Risk Rule.  You'll have an opportunity to ask your own questions during the webcast and hear directly from NCUA.  Save $100 by signing up by May 17th.  

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Testimony on the Hill.  This morning Ed Templeton, CEO of SRP FCU and NAFCU Board Treasurer, testified during the House Financial Services Committee hearing "Rising Regulatory Compliance Costs and Their Impact on Small Financial Institutions."

You can read more about today's hearing in the NAFCU Today.  Mr. Templeton's full written testimony can be found here.  I have a feeling quite a few blog readers will find themselves nodding their heads in agreement while reading the testimony.  

Compliance Resources: Newsletters; Webinars; Webcasts

Written by Steve Van Beek

Today's post seeks to aggregate some useful compliance resources. 

NCUA Listening Session.  The first of NCUA's six listening sessions is today in Boston.  Registration for all sessions is now available here.  

NAFCU Members.  The May 2012 NAFCU Compliance Monitor is now available.  This month the articles look at the CFPB's movements in mortgage servicing as well as third-party service providers.  For those who missed the April 2012 BSA Blast, it is available here.    

Both the Compliance Monitor and the BSA Blast are NAFCU-member publications.  If your credit union is interested in NAFCU membership, check out our trial membership program.  Additional member benefits are discussed here.  

If you are a NAFCU-member and would like to be added to the Compliance Monitor and BSA Blast email notification lists, just send us an email - [email protected].  

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Vendor Risk Management Webinar.  The Philadelphia Federal Reserve is hosting a free Risk Management Webinar today at 2:00 Eastern.  The slides are already up and available here.  

FinCEN Webinar.  FinCEN will be hosting a free May 8th webinar discussing the technical specifications of the new SAR, CTR and DOEP forms.  Registration is here.   

Note:  This webinar promises to be very, very technical and geared toward IT folks.  Be sure to pass this along to anyone at your CU who fits the bill.  FinCEN will be conducting a future webinar for compliance professionals. 

CU Online Upgrade Webinar.  NCUA recently announced an upcoming upgrade to CU Online.  The upgrade is scheduled for May 28th and NCUA is hosting a free May 15th webinar discussing the upgrade.  Registration is here.  

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NAFCU Webcasts.  We also have a series of upcoming webcasts that might be of interest:

• May 9th:  Essential Financial Literacy Education (Sign up today and save $100)
• May 17th:  IRA Compliance: Managing a Successful IRA Program
• May 24th:  An Inside Look at NCUA's Interest Rate Risk Rule

Remember, all NAFCU webcasts are available for one-year after the purchase date and can be viewed numerous times.  The Financial Literacy webcast is a good example.  Not many credit union Boards meet at 2:00 p.m. on a Wednesday - but your credit union can use the webcast at a Board meeting or training session by accessing the "on-demand" version. 

All NAFCU webcasts are listed here (both upcoming live webcasts and on-demand webcasts).  

Financial Literacy; NCUA LCU 12-CU-04; Remittance Transfers; NCUA IRR Video

Written by JiJi Bahhur, Regulatory Compliance Counsel

Financial Literacy Month.  April is Financial Literacy Month and NAFCU is conducting a survey of members seeking general information about the different types of financial literacy programs they offer and how the credit union determines the effectiveness of its program. 

For background information on Financial Literacy Month and where to obtain the results of NAFCU’s survey, check out this NAFCU Today story. 

NCUA also announced a twitter campaign for Financial Literacy Month.  The CFPB will also be active this month with information for consumers.

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NCUA Letter to Credit Unions 12-CU-04.  NCUA announced, in its Letter to Credit Unions 12-CU-04, that it’s making $1.3 million in grants available to low-income credit unions.  Any credit union with a low-income designation may apply for up to $25,000 in grants for initiatives covering financial literacy and education in school branches; new product/service development; staff, official and board member training; student and job creation internship; and/or volunteer income tax assistance. 

The LCU has an attached enclosure – 2012 Grant Guidelines for Low-Income Credit Unions – which provides examples of projects that these grants could fund, the grant process, and the application.  The deadline to apply for a grant under this program is June 29, 2012. 

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Remittance Transfers.  The CFPB recently blogged on the consumer benefits of the new remittance transfer rule, which goes in effect in February 2013:

“Better Disclosures: Under this rule, remittance transfer providers must generally disclose the exchange rate, any fees related to the remittance, the amount of money that will be delivered abroad, and the date the money will be available. Certain disclosures must be provided both before and after the consumer pays for a remittance transfer. Consumers will generally receive these disclosures in English and sometimes in other languages. The CFPB thinks the clarity provided by these disclosures will help inform consumer decisions and instill confidence.

Option to Cancel: Typically, consumers will have at least 30 minutes after payment to cancel a remittance. If they cancel within the 30 minute window, they will get their money back, whether they make a mistake, change their minds, or feel something isn’t right.

Correction of Errors: With this rule, remittance transfer providers will generally be held accountable for errors. If a remittance sender reports a problem with a transfer within 180 days, the provider must generally investigate and correct errors. Companies that provide remittance transfers may also be responsible for mistakes made by their agents. The CFPB believes this will encourage remittance transfer providers to use reliable agents and partners in the U.S. and abroad, helping to weed out the bad actors.” 

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NCUA IRR Video.  NCUA released its third economic update series, which features an in-depth discussion on NCUA’s Interest Rate Risk (IRR) rule.  The rule essentially requires a written policy to address IRR management and an effective IRR program for successful asset liability management.  To see the free video, go here (Youtube.com). 

Also, NAFCU Members, the April Compliance Monitor features an article on Interest Rate Risk with additional information and resources on the new requirement (Effective September 30, 2012).  

Playing Catch-Up: SAFE Act Procedures; Compliance Monitor; Final Regulations

Written by Steve Van Beek

Initially, I want to say Thank You to all the attendees at last week's Regulatory Compliance School.  It was a great week, made even better by the great questions and interaction among attendees.  Thank You - and hope to see you at Regulatory Compliance Seminar in the future (no tests - I promise!)  

And - good luck to everyone who took the NCCO Exams!  

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Strange as it sounds, it feels good to be back in the office after a long week at School.  I'm sure there are more than a few items to get up to speed on, but first a few older items that might be useful.

CFPB's SAFE Act Examination Procedures.  On March 7, the CFPB announced their SAFE Act examination procedures.  While the CFPB's primary examination authority extends only to credit unions above $10 billion in assets, all credit unions offering mortgage loans need to follow Regulation G - 12 CFR 1007.  I'd pass these examinations procedures along to the appropriate folks at your credit union as NCUA might take a similar approach in its future examinations.  If nothing else, the examination procedures could serve as a useful internal audit tool.      

NAFCU's March Compliance Monitor.  The March 2012 NAFCU Compliance Monitor is available.  The Worth Noting section highlights issues over the past month or so that might impact your credit union and there are articles on the CFPB and small blurbs on Health Care Reform and Periodic Statements for Mortgages.  

The Compliance Monitor is a NAFCU member-only publication.  If your credit union is interested in learning more about NAFCU membership, take a peek at our trial membership program.

NAFCU Final Regulation - Reg E:  International Remittances.  NAFCU-members, our Final Regulation on the Remittances rule is available (12-EF-02).  Compliance is required by February 7, 2013. 

NAFCU Final Regulation - NCUA:  Interest Rate Risk Policy.  Our Final Regulation on NCUA's Interest Rate Risk Policy and Management is also available (12-EF-01).  Remember, compliance is required by September 30, 2012.

Regulatory Compliance School; NCUA Board Meeting & NCUA Report; Division 3 Update

Written by Steve Van Beek

Just wanted to provide a short note regarding next week.  

Reg School.  NAFCU's Regulatory Compliance School takes place next week.  Our Compliance Team will be in and out of the office next week giving presentations, so please bear with us as our response times will be a little longer than normal.  The blog will continue as usual.  

Study Guide & GPS.  For those attending school next week, we've put together a handy Study Guide to help if you will be taking the exams to obtain your NAFCU Certified Compliance Officer (NCCO) designation.  Additionally, be sure to download your version of the Updated 2012 NAFCU Credit Union Compliance GPS (you will also receive a hard copy of the GPS at School).

Note:  For those not attending Compliance School, the Updated GPS will be available for purchase very shortly.  Blog readers will be the first to know when the Updated GPS is available.    

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NCUA Board Meeting.  Late yesterday, NCUA announced their agenda for next Thursday's NCUA Board Meeting.  You can find the agenda here.

NCUA Report.  NCUA also released their March 2012 issue of the NCUA Report.  This looks to be a good one to read, here is what is discussed:

• Chairman Matz's Corner: CFPB Director Cordray Answers Key Questions on NCUA Webinar 
• Building Wealth and Deposits: An Opportunity for Credit Unions – Individual Development Accounts, Part II
• Board Perspective: Interest Rate Risk Policy and Program
• Board Perspective: The Rites of Spring
• Understanding Credit Union Indirect Lending Programs
• Elements of an Effective Member Business Lending Program
• Trends in Member Complaints and Consumer Inquiries

Quite a few of those look like good reads.  Be sure to pass those along to others at your credit union who might be interested.  

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A quick update on the potential Division 3 basketball matchup between Hope College (my alma mater) and the College of Wooster (my wife's alma mater).  Wooster held up their end of the bargain but Hope fell in double-overtime.

I was really hoping for this matchup as I thought it would be a lot of fun.  I can't say the same about my wife.  Wooster's game finished a good half hour before Hope finally lost.  She spent the majority of that time on the phone with her Dad - who works at the College of Wooster - discussing the potential matchup and rooting against Hope.  As she so elegantly stated it:  "I want Wooster to win and that means Hope needs to lose, so be it."