By Mark H. Smith, Founder, Mark H. Smith, Inc.

Managing Interest Rate Risks: Who's Responsibility Is It?

In its IRR Regulation adopted in September of 2012, NCUA clearly defined the responsibilities for managing IRR. In Part 3 of Appendix B, NCUA names the board of directors as responsible for approving policy, major strategies, and prudent limits regarding IRR exposure. The board is charged with the responsibility to ensure that the professional management of the credit union executes an effective IRR program. Additionally, the board is charged with making an annual assessment and determining that the IRR program sufficiently identifies, measures, monitors, and controls the IRR exposure. It goes on to say the board may obtain professional advice and training in going about its responsibilities.

The CEO and other senior officers of the credit union, under the direction of the board, carry out the IRR management process. The Regulation also allows for the injection of an ALCO into the management process. The following specific responsibilities are mentioned:

  • Maintain adequate and appropriate IRR measurement systems
  • Evaluate and understand interest rate risk
  • Maintain internal controls in the IRR management process
  • Allocate resources to IRR management in accordance with the credit union’s level of complexity
  • Maintain competent staff with technical expertise
  • Establish clear lines of authority
  • Identify and be knowledgeable with the procedures and assumptions used to estimate IRR
  • Provide suitable reporting to the board of directors

We interpret this Regulation to mean that the board of directors should have sufficient understanding to recognize the implications of interest rate risk and its potential harm to the credit union’s future earnings and economic value. Most boards that we interact with at Mark H. Smith, Incorporated, struggle with this requirement. They rely heavily on the management of the credit union to guide them in this responsibility.

In some cases, the professional management of the credit union also struggle in executing their responsibilities with respect to IRR. Many utilize the income simulation method to estimate risk. This methodology is straight-forward in its concept but complex in its application. Regulators appear to be swinging toward an economic value (NEV) approach to estimate IRR. This is especially true if the credit union’s balance sheet holds fixed-rate mortgages and/or long-term investment securities.

In order to assist our clients and other credit unions, we are updating and revamping our ALM Exploration Series presentations into a four-part webinar format. These programs are absolutely free and imply no obligation on the credit union’s part. They are set at the introductory level and are an ideal resource for directors and some management staff who need basic understanding of IRR issues. Parts 1 and 2 have already been presented but are available for viewing in our webinar archives—again at no cost. We invite anyone with an interest to view the two most recent webinars. Parts 3 and 4 will be presented later in May. You may go to our website and register.

For those needing a more robust training regimen with respect to IRR, we will be traveling to approximately 30 cities in the US in the second half of 2015. We will be presenting a live intermediate level seminar addressing credit union interest rate risk. These seminars are absolutely free. You may go to the website again to view the seminar schedule and to register.

We welcome questions about interest rate risk and about the responsibilities of the board of directors and management. You may address your questions to or call 800-268-7795.

We wish you success in this challenging economic environment.