Risk Management

Credit unions identify, measure, manage, and control sensitivity to market risk through the IRR management framework, which is established in the credit union’s policies and procedures. The framework begins with sound management oversight and covers strategies, policies, risk controls, measurements, reporting responsibilities, and independent review.

A credit union’s approach to its IRR management should correspond with its balance sheet complexity and risk profile. A prudent credit union establishes strong risk management and internal controls to proactively identify, measure, monitor, and control sensitivity to market risk. To manage IRR, a credit union should address changes to the current interest rate environment and the potential impact to liquidity, credit, and funding costs.

A credit union that maintains basic balance sheet structures, has moderate exposure to embedded options, and does not use complicated funding or investment strategies may find a less complex IRR management program sufficient.

More complex portfolios need more formal, detailed IRR management programs that establish specific controls based on analysis and ensure that their approach to IRR management addresses all major risk exposures. Internal controls at complex credit unions should include a thorough independent review and validation process for the IRR processes. Complex credit unions benefit from higher standards for separation of duties as well.

In all cases, a credit union is best served by approaching IRR management with a program that is commensurate with its complexity, risk profile, business model, and scope of operations. Regardless of size and complexity, all credit unions should clearly document their policies and procedures, and senior management should review these documents periodically. As a foundation for IRR management, the credit union’s senior management and 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.

There is a wealth of guidance for credit unions to reference when considering sensitivity to market risk, IRR, and associated management strategies, starting with the list below.

• NCUA Letter to Credit Unions 10-CU-06, Interagency Advisory on Interest Rate Risk Management, emphasizes the importance of effective governance, policies and procedures, risk management and monitoring systems, stress testing, and internal controls related to IRR exposures

• NCUA regulations § 741.3(b)(5) and part741, Appendix A, Guidance for an Interest Rate Risk Policy and an Effective Program, outline requirements and provide guidance on developing an effective IRR program

  Note: part 741, Appendix A applies to all federally insured credit unions with assets equal to or greater than $50 million but can be referenced by any credit union seeking to build a robust approach to managing IRR.

• Letter to Credit Unions 99-CU-12, Real Estate Lending and Balance Sheet Risk Management

• Letter to Credit Unions 03-CU-15, Real Estate Concentrations and Interest Rate Risk Management for Credit Unions with Large Positions in Fixed Rate Mortgages

• Letter to Credit Unions 22-CU-09, Updates to Interest Rate Risk Supervisory Framework

Further, the FFIEC issued a supplemental advisory, Interagency Advisory on Interest Rate Risk Management – Frequently Asked Questions, to clarify points and answer questions related to NCUA Letter to Credit Unions 10-CU-06, Interagency Advisory on Interest Rate Risk Management.

This section addresses the following topics:

• Governance

• Policies and Processes

• Internal Controls

Last updated on December 06, 2024