Just over 6 years ago, the National Credit Union Administration (NCUA) announced key changes to interest rate risk supervision during its June 16, 2016 board meeting, which included the rollout of the Net Economic Value (NEV) Supervisory Test. Developed to help identify potential instances of unsafe and unsound risk exposure within the industry, the test has become a mainstay of the regulatory interest rate risk measurement process, and we run hundreds of these tests each quarter at ALM First to help credit union clients monitor the assessment’s results and prepare for examinations.
For ALM practitioners familiar with the design of the test, the recent trend of test results comes as no surprise. The first quarter of 2022 saw a significant rise in the level of risk indicated by this test, as evident in our historical results (Figure 1), which shows the frequency of the four risk category results. While the test results have been trending worse for some time, they have worsened substantially from Q4 2021 to Q1 2022 as interest rates increased substantially (between 50 and 150 basis points depending on curve tenor). According to our data as of Q1 2022, the High and Extreme categories represent nearly 50% of all test results.
For those less familiar with the mechanics of the assessment tool, let’s define the NCUA’s NEV Supervisory Test in greater detail. The NCUA NEV Supervisory Test is an NEV sensitivity measurement using standardized values for non-maturity deposits (NMDs) in lieu of the credit union’s applied fair values; the fair values for all other accounts are left unchanged (e.g., loans, investments, term deposits).