The prospect of a new year often provides the impetus for organizations to
rethink their existing business methods for areas of improvement. For credit
unions this analysis can extend beyond their core processes, such as the delivery
of products and member services, to the policies affecting how they manage their
balance sheet and investment portfolios.
A systematic re-examination of existing asset/liability management (ALM) and
investment guidelines can help credit unions adapt their current policies to
reflect how business has grown in the past year - and is projected to grow
for the upcoming one.
Credit union ALM/investment policies are increasingly becoming the main focus
of supervisory reviews because of rising interest rates. In addition, as balance
sheets comprise more real estate loans and complex investments it is doubtful that
policies written for a different asset "mix" will maintain relevance as a risk
measurement guideline. Remember, understanding how much interest rate risk exists
in the balance sheet through ALM software is only half the process: having a
policy that addresses the concerns of your board, senior management and recent
letters to credit unions from NCUA is just as critical as knowing the impact
of a rate shock.
Some essential questions from NCUA's Interest Rate Risk Review Questionnaire
that need to be addressed when reviewing existing policies related to investment
and balance sheet risk are:
- Does the policy address internal controls governing the ALM process?
- Who has primary responsibility for implementing the ALM policy?
- Does the policy establish IRR limits based on a stressed rate environment?
One of the best ways to asses your current policies against the industry's
best practices is to dialogue with other credit unions to learn how they are
currently managing this aspect of their business. From this dialogue, credit
unions can determine what would work best in their own organizations, as well
as offering their own thoughts on what has and hasn't worked for them.