The IRR management framework sets forth strategies and risk tolerances as established in the credit union’s policies and procedures that guide the identification, measurement, management, and control of sensitivity to market risk. The framework begins with sound management oversight and covers strategies, policies, risk controls, measurements, reporting responsibilities, and independent review functions.
The organization of the IRR management program should correspond with a credit union’s balance sheet complexity and risk profile. Less complex programs may be adequate for credit unions that maintain basic balance sheet structures, have moderate exposure to embedded options, and do not use complicated funding or investment strategies. However, all credit unions should clearly document their procedures, and senior management should actively review those policies and procedures on a periodic basis.
More complex portfolios need more formal, detailed IRR management programs. In such cases, management should establish specific controls and produce analyses that address all major risk exposures. Internal controls at complex credit unions should include a more thorough independent review and validation process for the IRR processes used, as well as more rigorous requirements for separation of duties.
Management and the board should understand the IRR implications of the credit union’s activities, products, and strategies, while also considering their potential impact on market, liquidity, credit, and operational risks.
NCUA regulations § 741.3 (b)(5) and Appendix B outline requirements and provide guidance on developing an effective interest rate risk program. Additional guidance is available in:
- Letter to Credit Unions 12-CU-05, Interest Rate Risk Policy and Program Requirements
- Letter to Credit Unions 12-CU-11, Interest Rate Risk Policy and Program Frequently Asked Questions
Last updated October 11, 2016
