WASHINGTON—While NCUA Chairman Debbie Matz is now suggesting that a separate interest rate risk rule may not be forthcoming, the agency has shared with CUToday.info insights into how IRR may instead be dealt with.
Larry Fazio, NCUA director of examination and Insurance, explained that while the agency has pulled IRR from credit risk, it still must deal, from a PCA construct, with IRR in the RBC proposal.
“RBC 2 is only credit risk and a little bit of concentration risk, but we still have to deal with IRR,” said Fazio. “We are not doing it in the risk weights of the RBC, so we have to come up with another way of doing IRR in terms of a PCA construct.”
Fazio said that in the preamble (to the second risk-based capital rule) NCUA indicated it is “looking at net economic value, or NEV. So we say we could have this second ratio, tied to your capital classification, that we have credit unions calculate. And as long as you don’t go below a certain threshold you are fine. But if you go below a certain threshold, like zero, in a shocked-rate scenario, then you would be considered undercapitalized.”
Fazio said most CUs have some exposure to IRR, but the vast majority would be fine under any metric the agency would design. “So basically we want a ‘don’t go there’ standard.”
NCUA’s 2015-16 Performance Plan (page 15) shared the following goal, detailing a timeline for IRR:
“Develop a proposal for a separate interest rate risk component for complex credit unions’ risk based net worth requirement, by Dec. 31, 2015.”