Updates to Interest Rate Risk Supervisory Framework

Dear Boards of Directors and Chief Executive Officers:

The NCUA has revised its interest rate risk (IRR) supervisory framework and issued the attached Supervisory Letter to exam staff to increase clarity and flexibility. The changes to the IRR supervisory framework will improve the focus of the NCUA’s supervision of IRR in credit unions given current market conditions.

The primary changes to the NCUA’s supervisory framework are:

• Revising the risk classifications by eliminating the extreme risk classification and modifying the high risk classification;
• Clarifying when a Document of Resolution (DOR) to address IRR is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan;
• Providing examiners more flexibility in assigning IRR supervisory risk ratings; and
• Revising examination procedures to incorporate updated review steps when assessing how a credit union’s management of IRR is adapting to changes in the economic and interest rate environment.

Responding to changing economic and interest rate environments is essential to credit unions’ prudent IRR management and the related risks to capital, asset quality, earnings, and liquidity. Credit unions need to remain disciplined in managing their interest rate, liquidity, and related risks as they navigate the current economic and interest rate environment.

The attached Supervisory Letter will help federally insured credit unions better understand the NCUA’s expectations for managing IRR. I encourage all federally insured credit unions to review the enclosed Supervisory Letter and to take appropriate steps to mitigate risk, if needed.

The NCUA will continue to periodically assess the risk classifications and parameters used in its IRR measurements to ensure their appropriateness. Please contact your NCUA regional office or state supervisory authority if you have any questions.