The Sensitivity to Market Risk rating reflects the exposure of a credit union’s current and prospective earnings and economic capital arising from changes in market prices and interest rates. Effective risk management programs include comprehensive IRR policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.
Sensitivity to Market Risk ratings are based on, but not limited to, the following evaluation factors. The order of these factors does not signify a level of importance.
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Sensitivity of a credit union’s current and future earnings and economic value of capital to adverse changes in market prices and interest rates
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Management’s ability to identify, measure, monitor, and control exposure to market risk considering a credit union’s size, complexity, and risk profile
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The nature and complexity of IRR exposure
Sensitivity to Market Risk Ratings
| Ratings | Description |
|---|---|
| 1 | Indicates risk management practices and controls for market risk are strong for the size and sophistication of the credit union and the level of market risk it has accepted. There is minimal potential for market price or interest rate changes to damage the credit union’s earnings performance or capital position. The credit union has more than sufficient earnings and capital to support the level of market risk taken by the credit union. |
| 2 | Indicates risk management practices and controls for market risk are satisfactory for the size and sophistication of the credit union and the level of market risk it has accepted. There is only moderate potential for market price or interest rate changes to damage the credit union’s earnings performance or capital position. The credit union has sufficient earnings and capital to support the level of market risk taken by the credit union. |
| 3 | Indicates risk management practices and controls for market risk are not fully commensurate with the size and sophistication of the credit union or the level of market risk it has accepted. There is high potential for market price or interest rate changes to damage the credit union’s earnings performance or capital position. The level of market risk taken is high in relation to the credit union’s earnings or capital. |
| 4 | Indicates risk management practices and controls for market risk are significantly deficient given the size and sophistication of the credit union or the level of market risk it has accepted. There is high potential for market price or interest rate changes to threaten the viability of the credit union. The level of market risk taken is excessive in relation to the credit union’s earnings or capital. |
| 5 | Indicates the level of market risk taken or exposure to market price or interest rate changes is an imminent threat to the credit union’s viability. |
Last updated April 29, 2022
