Governance

A credit union’s board of directors and management should understand the IRR implications of its business activities, products, and strategies.

This topic addresses the following:

• Board of Directors

• Asset-Liability Committee

• Senior Management

Board of Directors

The board of directors is ultimately responsible for oversight of a credit union and for approving policy, major strategies, and prudent limits regarding IRR. To meet this responsibility, the board should understand the level and nature of the credit union’s IRR exposure. Where necessary, the board should consider obtaining professional advice and training to enhance its understanding of IRR oversight.

The board is also responsible for:

• Ensuring that credit union management executes the IRR policy effectively

• Assessing how well the IRR policy identifies, measures, monitors, and controls the credit union’s IRR exposure

Asset-Liability Committee

A credit union’s board typically delegates responsibility for establishing specific IRR procedures to a committee comprised of senior managers, credit union staff, and board members. This committee is often referred to as the ALCO. Smaller credit unions with limited staff and resources may delegate ALCO responsibilities to the manager and the board. An ALCO, if appointed, typically manages the structure of the credit union’s balance sheet and is responsible for ensuring that:

• IRR measurement systems accurately reflect the credit union’s risk exposure

• Reporting systems adequately communicate relevant information concerning the level and sources of the credit union’s exposure

The ALCO may also recommend or implement risk mitigation when necessary.

The ALCO should include representatives from each of the credit union’s major functional areas that expose it to IRR (for example, lending and investment departments). Preferably, at least one board member will sit on the ALCO. This improves communication between the ALCO and the board and increases board members’ awareness of the credit union’s IRR position. All ALCO members should understand IRR and, as the credit union’s balance sheet becomes more complex, they should receive additional IRR training.

Senior Management

An effective IRR management program measures the credit union’s overall level of IRR exposure, communicates the results to officials, initiates action to remain within policy limits, and controls for the potential impact of market risk. Credit union management should understand the IRR implications to its business activities, products, and strategies, and share this information with the board.

A credit union’s senior management is responsible for the daily management of activities and operations. To implement the board’s IRR policy, management’s responsibilities include, but are not limited to:

• Developing and monitoring appropriate risk limits including the procedures for exceptions and ensuring the compliance with the limits

• Developing and using adequate IRR measurement systems

• Evaluating and understanding the IRR exposure

• Establishing an appropriate system of internal controls

• Allocating sufficient resources for an effective IRR program

• Developing and supporting competent staff with technical expertise commensurate with the IRR policy and procedures

• Identifying the procedures and assumptions involved in implementing the IRR measurement systems

• Establishing clear lines of authority and responsibility for managing IRR

• Providing sufficient reporting to comply with board-approved policies

Last updated on December 06, 2024