System Capabilities

The IRR measurement system should capture and reliably estimate all material risk exposures. Therefore, the system should consider all significant balance sheet categories, income statement items, and underlying risk factors. For example, if a credit union has a large concentration of mortgage loans or MBS, then its measurement system should be able to adequately incorporate prepayment projections. Likewise, if the credit union has a mortgage operation that generates material fee income, its system should capture the rate sensitivity of this non-interest income.

When a credit union develops an IRR measurement system internally or considers acquiring a third-party system, management should fully understand its capabilities and assess its suitability by evaluating the system’s ability to reasonably capture all relevant and material IRR exposures. Additionally, management should periodically re-evaluate the system’s adequacy as the credit union’s balance sheet, strategies, and activities change.

Some measurement systems have limited ability to change model assumptions. In these cases, the examiner may need to determine if the measurements are suitable for the size and complexity of the credit union. More complex systems can support many scenarios and assumptions, and management should thoroughly support and document assumptions related to the most significant risks.

Last updated on December 06, 2024