Q&A with Emily Hollis

Emily Hollis
March 31, 2010 | COMMENTS

Question: In a recent exam, the NCUA told us that their ALM risk measurement tables are only guidelines and should not be used—is this true?

We have heard similar responses from a number of clients, that NCUA believes these are just guidelines. At other times, credit unions have expressed to us that NCUA assumes these guidelines only when non-maturing deposits are placed at par, an assumption that we are unable to find in the guidelines.

The NCUA's risk measurement guidelines are listed below. The guidelines are based upon an immediate and sustained up 300 basis point (bps) interest rate environment, and may be found on NCUA's website via the following hyperlink: www.NCUAExaminersGuide.gov.

IRR Exposure

The Office of Thrift Supervision (OTS) has adopted a measurement table that defines degrees of interest rate risk. The OTS has selected the NEV* ratio as the sole measure of risk exposure for financial institutions within its jurisdiction. NCUA has opted for five tests which can sometimes be confusing and at times seemingly contradictory.

The following table represents risk measurement guidelines of the OTS. The table can be found in the TB 13a “Management of Interest Rate Risk Investment Securities, and Derivative Activities,” dated December 1, 1998, on the OTS website and via the following link. The table, found on page eight is based upon a 200 bps post shocked NEV value.

As an example, an institution that has a base NEV ratio of 8 percent and post 200 bps shock NEV ratio of 6.50 percent, would be deemed to have a minimal amount of interest rate risk. An institution would find the line of its post NEV shock in the first column and then follow the line to the right under the column of the nominal movement, in this case 150 bps.

Summary of Guidelines for the “Level of Interest Rate Risk”

I believe that the OTS tables are well thought out. Case in point: take a credit union that has a base NEV value of 12 percent and a post NEV ratio of 6 percent. According to the NCUA table, the NEV percent change shows “high” and the NEV ratio shows “low,” which one is it? Moreover, credit unions with ample capital and modest earnings may find themselves in the low-risk category for the NEV test, yet in the high-risk category when the NII test is applied. However, in contrast, according to the OTS tables, the risk of this institution is clearly identified and is “significant.”

These tables do give policymakers a set of guidelines for interest rate risk; however, bear in mind that asset liability management is a complex process and that interest rate risk analysis is more of an art form than science.

Emily M. Hollis, CFA, is a partner of ALM First Financial Advisors in Dallas, Texas. Contact Hollis at 800-752-4628 or ehollis@almfirst.com.

*The OTS uses an “NPV ratio” as its measurement, which stands for net present value. The concept is identical to the NEV ratio.