No. 2001-03
DATE: October 5, 2001
SUBJ: Interest Rate Sensitivity Analysis in Low Rate Environments
TO: The Corporate Credit Union Addressed:
Recently, many Treasury security yields have been less than three percent. Section
704.8(d)(i) of NCUA’s Rules & Regulations requires a corporate credit
union to evaluate the impact of a shock in the Treasury yield curve of plus
and minus 100, 200, and 300 basis points on its NEV, NEV ratio, and net interest
income. However, when Treasury yields are less than three percent, a theoretical
rate decline of 300 basis points would result in negative Treasury yields. Corporate
credit unions do not need to perform the interest rate sensitivity analysis
for a decline of 200 or 300 basis points required by §704.8(d)(i) to the
extent the parallel shock in the Treasury yield curve would result in a negative
Treasury yield.
To avoid use of negative Treasury yields, you should report on the 5310 Call Report the impact of a rate decline of 200 or 100 basis points when the yield on any Constant Maturity Treasury is three percent or less at month end, as shown in the table below.
5310 CALL REPORT INSTRUCTION FOR LOW RATE ENVIRONMENTS
| Lowest Constant Maturity Treasury Yield* | Report the Impact of a Shock of: |
| Less than or equal to three percent, but greater than two percent | Minus 200 basis points |
| Less than or equal to two percent | Minus 100 basis points |
* As reported for “Treasury constant maturities” in the Federal
Reserve Statistical Release, H.15 Selected Interest Rates, http://www.federalreserve.gov/releases/H15/update/.
For management and asset/liability committee information purposes, we suggest you prepare an analysis of a 400-basis-point increase in the Treasury yield curve when Treasury yields are less than three percent. Similarly, you may wish to prepare an analysis of a 500-basis-point increase in the Treasury yield curve when Treasury yields are less than two percent. However, NCUA does not require these suggested, additional analyses. You should continue to report the impact of the plus 300-basis-point shock on the 5310 Call Report.
If you have any questions, please contact the Office of Corporate Credit Unions
at (703) 518-6640, or your state regulator.
Sincerely,
Dennis Dollar
Chairman
cc: State Supervisory Authorities
NASCUS
NAFCU
ACCU
bcc: Reading File
Regional Directors
All OCCU Staff
Office of General Counsel
draft: s:\WorkIn Process\Office Staff\Shetler\Draft Interest Rate Shock Letter.doc
final: s:\Directives\OCUGuidanceLetter\2001-XX-Interest Rate Shocks.doc