Current through Supplement No. 392, April, 2024
1. Any credit union
that has assets of less than fifty million dollars must maintain a basic
written policy that provides a credit union board-approved framework for
managing interest rate risk.
2. Any
credit union that has assets of fifty million dollars or more is required to
have an interest rate risk policy and program that incorporates the following
elements into their interest rate risk program:
a. Board-approved interest rate risk
policy.
b. Oversight by the board
of directors and implementation by management.
c. Risk measurement systems assessing the
interest rate risk sensitivity of earnings and asset and liability
values.
d. Internal controls to
monitor adherence to interest rate risk limits.
e. Decisionmaking that is informed and guided
by interest rate risk measures.
3. The board of directors shall establish
adequacy of an interest rate risk policy and its limits. This must be either a
separate policy or part of other written policies. The policy must be
consistent with the credit union's business strategies and reflect the board's
risk tolerance, taking into account the credit union's financial condition and
risk measurement systems and methods commensurate with the balance sheet
structure. The policy must state actions and authorities required for
exceptions to policy, limits, and authorizations.
4. The policy established to address interest
rate risk must identify responsibilities and procedures for identifying,
measuring, monitoring, controlling, and reporting interest rate risk, and
establish risk limits. A written policy will:
a. Identify committees, persons, or other
parties responsible for review of the credit union's interest rate risk
exposure;
b. Direct appropriate
actions to ensure management takes steps to manage interest rate risk so that
interest rate risk exposures are identified, measured, monitored, and
controlled;
c. State the frequency
with which management will report on measurement results to the board to ensure
routine review of information that is current and at least quarterly and in
sufficient detail to assess the credit union's interest rate risk
profile;
d. Set risk limits for
interest rate risk exposures based on selected measures, such as limits for
changes in repricing or duration gaps, income simulation, asset valuation, or
net economic value;
e. Choose
tests, such as interest rate shocks, that the credit union will perform using
the selected measures;
f. Provide
for periodic review of material changes in interest rate risk exposures and
compliance with board-approved policy and risk limits;
g. Provide for assessment of the interest
rate risk impact of any new business activities prior to implementation such as
evaluating the interest rate risk profile of a new product or service;
and
h. Provide for at least an
annual evaluation of policy to determine whether it is still commensurate with
the size, complexity, and risk profile of the credit union.
5. Interest rate risk policy
limits must maintain risk exposures within prudent levels.
6. To implement the board's interest rate
risk policy, management shall:
a. Develop and
maintain adequate interest rate risk measurement systems;
b. Evaluate and understand interest rate risk
exposures;
c. Establish an
appropriate system of internal controls, such as establishing separation
between the risk taker and interest rate risk measurement staff;
d. Allocate sufficient resources for an
effective interest rate risk program. For example, a complex credit union with
an elevated interest rate risk profile likely will necessitate a greater
allocation of resources to identify and focus on interest rate risk
exposures;
e. Develop and support
competent staff with technical expertise commensurate with the interest rate
risk program;
f. Identify the
procedures and assumptions involved in implementing the interest rate risk
measurement systems;
g. Establish
clear lines of authority and responsibility for managing interest rate risk;
and
h. Provide a sufficient set of
reports to ensure compliance with board-approved policies.
7. Credit unions shall have interest rate
risk measurement systems that capture and measure all material and identified
sources of interest rate risk. An interest rate risk measurement system
quantifies the risk contained in the credit union's balance sheet and
integrates the important sources of interest rate risk faced by a credit union
in order to facilitate management of its risk exposures. This must include:
a. Model and analysis assumptions that are
reasonable and supportable;
b.
Documentation of any changes to assumptions based on observed
information;
c. Monitoring of
positions with uncertain maturities, rates and cashflows, such as nonmaturity
shares, fixed rate mortgages where prepayments may vary, adjustable rate
mortgages, and instruments with embedded options, such as calls; and
d. Interest rate risk calculation techniques,
measures, and tests to be sufficiently rigorous to capture risk. Some options
to calculate this risk include:
(1) Gap
analysis for noncomplex or low-risk balance sheets;
(2) Income simulation; and
(3) Net economic value.
8. Prudent internal controls must
be established as permitted by the size, structure, and risk profile of the
credit union.
9. Credit unions with
large or complex balance sheets shall establish prudent risk mitigation
processes which include:
a. A policy that
provides for the use of outside parties to validate the tests and limits
commensurate with the risk exposure and complexity of the credit
union;
b. Interest rate risk
measurement systems that report compliance with policy limits as shown both by
risks to earnings and net economic value of equity under a variety of defined
and reasonable interest rate scenarios;
c. The effect of changes in assumptions on
interest rate risk exposure results such as the impact of slower or faster
prepayments on earnings and economic value; and
d. Enhanced levels of separation between risk
taking and risk assessment such as assignment of resources to separate the
investments function from interest rate risk measurement, and interest rate
risk monitoring and oversight.
General Authority: NDCC 6-01-04
Law Implemented: NDCC
6-06-06
