Underscoring the urgent need for the NCUA to continue to modify its use of a Net Economic Value (NEV) Test to evaluate credit union exposure to sudden interest rate increases, the agency should “holistically review” the interest rate framework it has implemented since 2012, said William J. Mellin, New York Credit Union Association president/CEO, in a letter to NCUA Chairman Todd Harper on Monday.
“While the recent steps taken by NCUA in response to industry concerns are welcomed and needed steps in the right direction, more needs to be done,” Mellin said, noting that the Association greatly appreciates the agency’s willingness to engage with the credit union industry and its quick response to concerns.
In the letter, Mellin outlined steps the NCUA can take that are aimed at enhancing the credit union industry’s safety and soundness, while not restricting the flexibility of well-managed credit unions. Steps may include considering whether the NCUA’s existing use of NEV is appropriate for the credit union industry, as approximately 70% of credit union assets are derived from non-interest-bearing member deposits. He also noted the difficulty in accurately assessing the sensitivity of these deposits to changes in interest rates.
“The existing 1% premium imposed on credit unions by NCUA is, at best, a well-intentioned ultimately counterproductive one-size-fits-all valuation which has been proven to mis-categorize the financial strength of well-functioning credit unions,” the letter stated.
Mellin also suggested eliminating the use of NEV for categorization purposes, and if the agency is unwilling to take this step, provide credit unions the opportunity to demonstrate how their own existing approach for evaluating interest rate sensitivity either under NEV or within an entirely different ratio is sufficient.
Further, as NCUA recognized in 2012 that there are asset levels below which credit unions are best served with maximum flexibility in managing interest rate risk, the agency should update the existing enhanced regulatory thresholds, so that they only apply to credit unions with $500M or more in assets,” Mellin said.
Amen! Darling Consulting Group has been beating the drum for many years on the NEV Sup Test methodology and has been educating regulators and the entire industry on the shortcomings of the test. The NEV SUP Test is highly counterproductive and misdiagnosis the true risk profile of the CU industry. High performing, well managed CUs are being characterized as unsafe and unsound despite their asset sensitive profiles and improving metrics as rates rise. The recent supervisory letter is a step in the right direction, let’s hope the momentum continues and eventually the whole NMD valuation/premium issues are based on deposit analytics and not a one size fits all approach. A major disaster from the start!
Totally agree!