On several occasions, Credit Union Journal has reported on NCUA's new rule requiring an interest-rate risk policy and program for most federally chartered credit unions (Sept. 26, Sept. 20 and July 30). With the rule now in effect (Sept. 30), credit unions should consider how to incorporate and ensure compliance with these components:
* IRR policy. Your policy should establish measurable risk limits, be board-approved and reflect the board's tolerance for risk.
* Corporate governance. Ultimately, the board is responsible for your credit union's risk, so board members must thoroughly understand IRR and regularly monitor financial performance and risk position.
* Measurement and monitoring of IRR. Your system for measuring risk should be robust enough to determine IRR; third-party models may be used, but you need to understand the analytics, assumptions and methodologies used. Most credit unions are encouraged to use income simulation and NEV models.
* Internal controls and validation. Comprehensive internal controls help ensure that the IRR process is working effectively. An important aspect of internal controls is model validation by an independent third party with expertise in IRR modeling.
* Business strategies. IRR measurement systems should be integrated into your credit union's ongoing business decisions.
IRR management is critical from an examination perspective but, more importantly, it is vital to your credit union's financial performance and long-term success. If you haven't developed and put your plan and policy in place, it's time to get it done!
Senior ALM Analyst
First Carolina Corporate