ncua irr supervision take 2 v2 - vfccu.org irr supervision take 2_v2.pdf · •fact sheet: revised...
TRANSCRIPT
3/16/2017
1
NCUA Interest Rate Risk Supervision
Lisa BoylenSenior ALM AnalystMarch 21, 2017
Objectives
• Understand NCUA’s Revised Exam Procedures For Interest Rate Risk
• Understand Exam Scope and Ratings• Help You Prepare For Next Exam
3/16/2017
2
Regulatory Guidance Effective 1/1/2017• Letter to Credit Unions: 16-CU-08• Fact Sheet: Revised Interest Rate Risk Supervision• Revised Examiners Guide• Interest Rate Risk Review Procedures Workbook• Guide to Using NCUA’s Interest Rate Risk Exam
Procedures Workbook
NCUA IRR Supervision – Key Changes
1. New IRR Review Procedures Workbook2. Revised NEV thresholds 3. New NEV Supervisory Test4. New NEV tool – CUs with assets <= $50 million 5. Revision of Examiner’s Guide
3/16/2017
3
Exam Scope• Asset Size• Risk as Measured by
NEV Supervisory Test
• Special consideration for CU < $50 million
Exam Scope:Credit Unions – Total Assets <=$50 Million
• IRR rating based solely on NEV tool or• Examiner judgement on exam steps• IRR is high or extreme – expand scope
3/16/2017
4
Estimated NEV Tool
• Uses Call Report Data• Predefined ValuesAssetsCall Report Category Base NEV Up 300
Cash & Equivalents = Book Value = Book Value
Investments = MV reported on Call Report
Predefined % of Base Value by maturity ranging from ‐1.5% to ‐26.8%
Loans = Book Value Predefined % of Base Value by loan type ranging from ‐1.0% to ‐22.1%
Other Assets = Book Value = Book Value
Estimated NEV Tool
Liabilities
Call Report Category Base NEV Up 300
Non‐Maturity Shares Book Value x ‐1% Base Value x ‐4%
Certificates Book Value x 0.25% Predefined % of Base Value by maturity ranging from ‐1.5% to ‐12.0%
Borrowings Book Value x 0.25% Predefined % of Base Value by maturity ranging from ‐1.5% to ‐12.0%
Other Term Shares & Deposits
Book Value x 0.25% Predefined % of Base Value by maturity ranging from ‐1.5% to ‐12.0%
Other Liabilities = Book Value = Book Value
3/16/2017
5
Estimated NEV Tool
NEV Ratio & NEV Sensitivity
Call Report Category Base NEV Up 300
Total Assets Total of Base Values Total of Up 300 Values
Total Liabilities Total of Base Values Total of Up 300 Values
Net Economic Value Total Assets Base Value – Total Liability Base Value
Total Assets Up 300 Values –Total Liability Up 300 Values
NEV Ratio Base NEV/Base Assets Up 300 NEV/Up 300 Assets
NEV $ Sensitivity Up 300 NEV – Base NEV
NEV % Sensitivity NEV $ Sensitivity/Base NEV
Source: NCUA IRR Workbook Guide External
3/16/2017
6
Source: NCUA IRR Workbook Guide External
Source: NCUA IRR Workbook Guide External
3/16/2017
7
Sample CU
09/30/2016
Book Base Up 300 Book vs Base Base vs. 300 Book vs 300
TOTAL ASSETS 160,850,000 161,434,419 147,393,448 0.00% ‐8.70% ‐8.37%
TOTAL LIABILITIES 143,782,212 142,792,395 137,150,847 ‐0.28% ‐3.95% ‐4.61%
NET ECONOMIC VALUE
Net Economic Value (NEV) 17,067,788 18,642,025 10,242,601
NEV Ratio 10.61% 11.55% 6.95% Moderate
NEV Sensitivity ‐45.06% Moderate
NEV Ratio = Net Economic Value/Value of Assets
NEV Sensitivity = (Up 300 Value ‐ Base Value)/Base Value
ESTIMATED NEV TOOL
Balance Sheet Category
NEV Supervisory Test Risk Levels
Source: NCUA IRR Workbook Guide External
Extreme High Moderate Low
Post Shock NEV Ratio <=2% 2% ‐ 4% 4% ‐ 7% > 7%
Base to Shock NEV Sensitivity <= ‐85% ‐65% to ‐85% ‐40% to ‐65% > ‐40%
NEV Supervisory Test Risk Levels
NEV INDICATOR
3/16/2017
8
Credit Unions – Total Assets <=$50 Million
• Low to Moderate Risk - Currently have a model used only for regulatory compliance
Will examiner “judgement” require that I maintain a model?
• High Risk & No Model What are regulatory expectations?
Be prepared to discuss expectations with your examiner
Exam Scope• Asset Size• Risk as Measured by
NEV Supervisory Test
• Special consideration for CU < $50 million
3/16/2017
9
Exam Procedures – Review AreasMarket Risk
5 to 10 Steps
Earnings At Risk
3 to 6 Steps
Stress Testing
2 to 3 Steps
Measurement
Systems
1 to 5 Steps
Risk Management
4 to 13 Steps IRR Rating
Required Exam Steps:
1. Prepare the NEV Supervisory Test2. Determine the level of risk
Low to Moderate Risk:3. Determine accounts generating risk4. Determine reasonableness of valuations5. COA aggregations appropriate?
Market Risk
3/16/2017
10
Step 1: NCUA NEV Supervisory Test
Economic Value per CU ALM Model
NCUA NEV Supervisory Test
(000’s) Book Value
Base Up 300 Base Up 300
Assets 100,000 99,948 92,077 = CU Model Base = CU Model Up 300
NMS 75,000 72,528 67,967 BV x 99% NCUA Base EV x 96%
Other Deposits & Liabilities 15,000 14,976 14,564 = CU Model Base = CU Model Up 300
Total Liabilities 90,000 87,504 82,530 NMS + Other Deposits & Liabilities
NMS + Other Deposits & Liabilities
Capital (NEV) 10,000 12,444 9,547 Assets ‐ Liabilities Assets – Liabilities
NEV Sensitivity ‐23.3% (Up 300 Value – Base Value)/Base Value
NEV Ratio 10.37% Value of Capital/Value of Assets
Market Risk
Step 1: NCUA NEV Supervisory TestEconomic Value per CU ALM
ModelNCUA NEV Supervisory Test
(000’s) Book Value Base Up 300 Base Up 300
Assets 100,000 99,948 92,077 99,948 92,077
NMS 75,000 72,528 67,967 74,250 71,280
Other Deposits & Liabilities 15,000 14,976 14,564 14,976 14,564
Total Liabilities 90,000 87,504 82,531 89,226 85,844
Capital (NEV) 10,000 12,444 9,546 10,722 6,233
NEV Sensitivity ‐23.3% ‐41.9%
NEV Ratio 10.4% 6.8%
Market Risk
3/16/2017
11
Step 2: Level of Risk
Source: NCUA IRR Workbook Guide EXTERNAL
Market Risk
Step 2: Level of RiskEconomic Value per CU ALM
ModelNCUA NEV Supervisory Test
(000’s) Book Value Base Up 300 Base Up 300
Assets 100,000 99,948 92,077 99,948 92,077
NMS 75,000 72,528 67,967 74,250 71,280
Other Deposits & Liabilities 15,000 14,976 14,564 14,976 14,564
Total Liabilities 90,000 87,504 82,531 89,226 85,844
Capital (NEV) 10,000 12,444 9,546 10,722 6,233
NEV Sensitivity ‐23.3% MODERATE ‐41.9%
NEV Ratio 10.4% MODERATE 6.8%
Market Risk
3/16/2017
12
Step 3: Contributors to Risk
• Asset Contribution to Change • Loans• Investments
• Liabilities Contribution to Change• NMS• Certificates• Borrowings
Market Risk
Step 4: Asset Review
• Review Reasonableness of Asset Valuations • Loans• Investments• Cash
• Review Prepayment Assumptions • Review Discount Rate Assumptions
Market Risk
3/16/2017
13
Step 5: Account Aggregation & Data Completeness
• Is the model COA appropriately segregated to capture unique contractual and behavioral characteristics?
• Review the reconciliation between the model data and the CU’s financial statements or Call Report
Market Risk
CU Exam Preparation Tips• Calculate the NEV Supervisory test• Know the largest contributors to market risk • Ensure AFS security base case valuations agree to the
balance sheet• Ensure assumptions are supported and documented• Review COA • Documented reconciliation between model and
financials
Market Risk
3/16/2017
14
Book Value
Base Base 300+0 Base 300+0 $ Change % Change
Asset
Overnight Investment ‐ ‐ ‐ ‐ ‐
Cash
Cash 8,253,832 8,253,832 8,253,832 8,253,832 8,253,832 ‐ 0.00%
Cash (Total) 8,253,832 8,253,832 8,253,832 8,253,832 8,253,832 ‐ 0.00%
Investments ‐
Investments (Total) 185,598,491 185,602,112 178,356,616 185,602,112 178,356,616 (7,245,496) ‐3.90%
Loans
Vehicle Loans 94,775,449 93,960,815 89,945,432 93,960,815 89,945,432 (4,015,383) ‐4.27%
Other Secured 5,751,336 5,742,624 5,633,124 5,742,624 5,633,124 (109,500) ‐1.91%
Unsecured Loans 14,486,791 14,470,758 13,845,504 14,470,758 13,845,504 (625,253) ‐4.32%
Credit Cards 6,802,278 6,760,642 6,315,670 6,760,642 6,315,670 (444,972) ‐6.58%
First Mortgage 47,384,377 47,863,831 43,633,151 47,863,831 43,633,151 (4,230,681) ‐8.84%
Home Equity_Other RE 10,539,375 10,498,686 10,028,100 10,498,686 10,028,100 (470,586) ‐4.48%
Other Loans 1,526,836 1,480,454 1,337,648 1,480,454 1,337,648 (142,806) ‐9.65%
Allowance for Loan Losses (710,547) (710,547) (710,547) (710,547) (710,547) ‐ 0.00%
Loans (Total) 180,555,895 180,067,262 170,028,080 180,067,262 170,028,080 (10,039,182) ‐5.58%
Other Assets
Other Assets (Total) 17,864,512 17,864,512 17,864,512 17,864,512 17,864,512 ‐ 0.00%
Asset (Total) 392,272,730 391,787,718 374,503,041 391,787,718 374,503,041 (17,284,678) ‐4.41%
Economic Value NCUA NEV Test*
Book Value
Liability Base Base 300+0 Base 300+0 $ Change % Change
Deposits
Non Maturity Deposits 257,186,766 249,334,721 235,361,242 254,614,898 244,430,302 (10,184,596) ‐4.00%
Share Certificates 70,259,271 69,769,775 67,510,831 69,769,775 67,510,831 (2,258,944) ‐3.24%
IRA Shares 18,409,683 17,906,290 17,575,978 18,250,125 17,574,610 (675,514) ‐3.70%
Other Deposits ‐ ‐ ‐ ‐ ‐ ‐
Deposits (Total) 345,855,720 337,010,787 320,448,052 342,634,798 329,515,744 (13,119,054) ‐3.83%
Other Liabilities
Other Liabilities (Total) 5,756,432 5,756,432 5,756,432 5,756,432 5,756,432 ‐ 0.00%
Liability (Total) 351,612,152 342,767,219 326,204,484 348,391,230 335,272,176 (13,119,054) ‐3.77%
Economic Value of Equity 40,660,578 49,020,500 48,298,557 43,396,488 39,230,865 (4,165,624) ‐9.60%
NEV Supervisory Test*
Risk Rating Low
Post‐Shock NEV 10.48%
NEV Sensitivity (%) (9.60%)
*Using NMS Premiums of 1%/4%
Economic Value NCUA NEV Test*
3/16/2017
15
Required Exam Steps: Low to Moderate Risk
1. Compare CU Base Case Results to Actual Results2. Compare Shocked Results to Policy Limits
• Limits based on instantaneous & parallel are preferred• Is non-compliance reported to Board?
3. Earnings at Risk Results – Liabilities• Is Dividend (Interest) expense reasonable?• Review Material Assumptions – (NMS Betas, Lags)
Earnings At Risk
CU Exam Preparation Tips• Prepare report comparing actual to model projected
results (aka – backtesting)• Ensure you have reporting comparing earnings at risk
to policy limits• Ensure exceptions to policy are noted in the ALCO
minutes • Ensure assumptions are supported and documented
Earnings At Risk
3/16/2017
16
Sample Backtesting
Account
Average
Balance 4th QTR
Annualized
Yield/Cost
Average
Balance 4th QTR
Annualized
Yield/Cost
Variance
%
Annualization Factor 4 4
Total Loans to Members 558,409,472 5,301,734 3.80% 555,476,505 5,488,000 3.95% 3.51%
Total Cash & Investments 451,118,916 1,759,980 1.56% 454,565,551 2,165,000 1.91% 23.01%
Total Earning Assets 1,009,528,389 7,061,715 2.80% 1,010,042,056 7,653,000 3.03% 8.37%
Total Shares 720,419,730 973,429 0.54% 720,950,557 894,000 0.50% ‐8.16%
Borrowings 201,407,650 1,048,029 2.08% 201,793,066 1,322,000 2.62% 26.14%
Total Int Bearing Liabilities 921,827,380 2,021,459 0.88% 922,743,623 2,216,000 0.96% 9.62%
Net Interest Income 5,040,256 2.00% 5,437,000 2.15% 7.87%
Actual Projected as of 9/30/16
Sample CU
4th Qtr 2016 Actual Compared to Model Forecast as of 9/30/16
Base Case ‐ Static Rates
Required Exam Steps: Low to Moderate Risk
1. Review Rate Scenarios • Rate Shocks • Yield Curve Twists• Rate Ramps
2. Review Sensitivity Testing• NMS• Prepayments• Discount rate spread changes
3. Is stress testing addressed in policy?
Stress Testing
3/16/2017
17
CU Exam Preparation Tips• Include stress testing in your IRR process
• Scenario – Alternate rate scenarios• Sensitivity – Key Model Assumptions
Stress Testing
Required Exam Steps: Low to Moderate Risk
1. Review Model Capability• CU process for using the model• Model complexity sufficient to measure CU risk• Rate scenarios employed
Measurement
Systems
3/16/2017
18
Required Exam Steps: Low to Moderate Risk
1. Review Model Capability• CU process for using the model• Model complexity sufficient to measure CU risk• Rate scenarios employed
Measurement
Systems
Required Exam Steps: Low to Moderate Risk
1. Board & Senior Management Oversight – Meetings2. Policy Limits3. Reporting4. Internal Controls
Risk Management
3/16/2017
19
Step 1: Board & Management Oversight
• Review Board/ALCO minutes and ALCO packets• Check for evidence of annual policy review• Check for ALCO representation in strategic planning
session• Review frequency of meetings
Risk Management
Step 2: Policy Limits
• Review and evaluate policy limits and compliance with limits
• Risk to NEV and IRR stated as % or $• Income measured over at least one and two-year
horizons• Limits too high or too low?• Board review of
oRisk limit exceptionsoProposed management actions
Risk Management
3/16/2017
20
Step 3: Reporting
• Assess frequency of measurement• Verification of IRR results to ALCO & BOD including
trends• Assumptions changes documented with analysis of
impact
Risk Management
Step 4: Internal Controls
• Determination if internal controls are documented & approved
• Has review of internal controls noted any deficiencies• Risk taker (investment office or CEO) segregated from
the persons measuring risk
Risk Management
3/16/2017
21
Credit Union Exam Preparation
• Scheduled ALCO meetings with supporting minutes • IRR/ALM policy reviewed on an annual basis &
documented• Board/ALCO receives IRR results compared to policy
limits and trend analysis• Exceptions to limits are noted in minutes with a plan
of action• Review of assumptions• Internal controls documented and audited
Risk Management
Scoring Guidelines
• Separate Score for Each of the Areas• Overall IRR Rating
• Market Risk Score sets a floor• Other Risk Areas can reduce the score, but can’t improve it
3/16/2017
22
Scoring Guidelines Example
• Market Risk Score - Moderate• Other Areas - Low• Overall Score – Moderate – can never be better than Market Risk Score
Section Market Risk
Earnings at Risk
Stress Testing
MeasurementSystems
Risk Management
Score Moderate Low Low Low Low
Scoring Guidelines Example
• Market Risk Score - Low• Other Areas - Moderate to High• Overall Score – Examiner discretion. Other areas can lower the rating
to Moderate or High
Section Market Risk
Earnings at Risk
Stress Testing
MeasurementSystems
Risk Management
Score Low Moderate Moderate Moderate High
3/16/2017
23
“L” in CAMEL‘L’ in
CAMEL
IRR
Liquidity Risk
Strategic Risk
Reputation Risk
Overall IRR Score
Summary
• Calculate and Know your Market Risk Rating from the NCUA NEV Supervisory Test
• Review Guidance Provided by NCUA• Presentation Reviewed Only the Required Steps for Low to
Moderate – they are other optional steps that could be included in the exam
• Exam Preparation and Knowledge is key to a successful exam
3/16/2017
24
Regulatory Material Links
• Letter to Credit Unions: 16-CU-08• Fact Sheet: Revised Interest Rate Risk Supervision• Revised Examiners Guide• Interest Rate Risk Review Procedures Workbook• Guide to Using NCUA’s Interest Rate Risk Exam Procedures
Workbookhttps://www.ncua.gov/regulation-supervision/Pages/policy-compliance/communications/letters-to-credit-unions/2016/08.aspx
Contact
Lisa B. Boylen, CPASenior ALM Analyst
(336) 217-4906 (direct)(800) 585-4317 ext. 1605
7900 Triad Center Drive, Suite 410Greensboro, NC 27409
www.vfcccu.org