[Federal Register Volume 67, Number 16 (Thursday, January 24, 2002)]
[Notices]
[Pages 3514-3515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1682]


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NATIONAL CREDIT UNION ADMINISTRATION


Evaluation of Credit Union Non-Maturity Deposits; Request for 
Comments

AGENCY: National Credit Union Administration (NCUA).

ACTION: Request for comments.

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SUMMARY: NCUA is soliciting public comment on a study by National 
Economic Research Associates (n/e/r/a), titled ``The Evaluation of 
Credit Union Non-Maturity Deposits.'' NCUA intends to consider whether 
to use the study to prepare examiner guidance on the appropriate 
treatment of these instruments in the assessment of interest rate risk.

DATES: Comments must be received on or before April 24, 2002.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. You may fax comments to 
(703) 518-6319, or e-mail comments to [email protected]. Please send 
comments by one method only.

FOR FURTHER INFORMATION CONTACT: Jeremy Taylor, Senior Investment 
Officer, Office of Investment Services, at the above address or 
telephone (703) 518-6620; or Dan Gordon, Senior Investment Officer, 
Office of Investment Services, at the above address or telephone (703) 
518-6620.

SUPPLEMENTARY INFORMATION:

A. Background

    NCUA commissioned n/e/r/a, an economics-consulting firm, to 
complete a study of methods to value non-maturity shares. The study has 
been completed and is available following the text of this Request for 
Comments on the NCUA website at http://www.ncua.gov/news/draftboardactions/BAM-01-12-13-6.pdf. Alternatively, to get to the 
study from the NCUA website (www.ncua.gov), select News, then Proposed 
Rules, then select on the page that follows, Request for Comments ``The 
Evaluation of Credit Union Non-Maturity Deposits.'' It can also be 
obtained in hard copy by requesting it from the Office of Public and 
Congressional Affairs, 1775 Duke Street, Alexandria, Virginia, 22314-
3428, telephone number (703) 518-6330.
    NCUA believes the majority of credit unions would not be affected 
by the results of the n/e/r/a study, either because their interest rate 
risk profile is limited, or because they treat shares at par value for 
interest rate risk measurement purposes. This study will be most 
relevant to those institutions that assume non-maturity shares 
materially mitigate the risk of a high level of long-term assets.
    Non-maturity shares include share drafts, regular shares and money 
market share accounts. Non-maturity shares may provide mitigation of 
interest rate risk to the extent they are a stable, low cost source of 
funds. Non-maturity shares have uncertain cash flows. This is because 
they have no contractual maturity and the dividends are set by the 
credit unions. Therefore, in interest rate risk assessment, credit 
unions must make assumptions on these cash flows.
    NCUA in its asset liability review questionnaire provides guidance 
to examiners in establishing a scope for their review of a credit 
union's asset liability management (ALM), including assessment of 
interest rate risk. However, the questionnaire does not provide a 
framework for examiner review of non-maturity share assumptions.
    The n/e/r/a study contains a comprehensive review of the literature

[[Page 3515]]

on valuing non-maturity deposits. It provides a conceptual evaluation 
of alternative methods, with an analysis of the costs and benefits of 
these methods. The study discusses implementation issues for NCUA and 
credit unions, and provides recommendations for the most suitable 
valuation approaches to meet NCUA and credit union needs. The study 
proposes effective maturities that may reasonably be used for credit 
union shares where the cash flows are not explicitly documented and 
modeled by the credit union. The study proposes a method to value these 
shares, and discusses the appropriate discount rate for these funds. 
The characteristics of credit union shares, and their differences from 
bank depository funds, are included in the discussion. Recommendations 
are also provided where credit unions analyze their cash flows from 
these shares.
    The n/e/r/a study may be useful in evaluating net economic value 
(NEV) analysis. NEV analysis measures the potential effect of changes 
in interest rates on net economic value (NEV). NEV means the fair value 
of assets minus the fair value of liabilities. Valuation techniques 
used to estimate fair values require assumptions about maturities and 
interest rates to calculate the present value of cash flows of non-
maturity shares. As with gap analysis and review of income simulation 
models, examiners judge whether these assumptions are reasonable.

B. Areas for Comment

    When its analysis of the n/e/r/a study is completed, NCUA will 
likely use the conclusions to provide guidance for examiner ALM scope 
determination and evaluation of credit union interest rate risk models 
and consider what should be the next stage in the evaluation of these 
issues. NCUA desires to identify reasonable methods for assumptions, 
valuation techniques and estimated values for non-maturity shares.
    NCUA is soliciting comments on the study. Specifically, the agency 
is interested in comment on the following issues.
    (1) Provide specific comments on the study. If there are points 
with which you disagree or you believe are incorrect, provide both the 
specific citations in the study and the support for your conclusion.
    (2) NCUA is considering establishing a ``safe harbor'' for non-
maturity share assumptions, such as a maturity of 1.0 year for money 
market shares, 2.5 years for regular shares, and 3.0 years for share 
drafts. Examiners would judge these, or shorter, terms to be acceptable 
maturity assumptions for non-maturity shares. Please comment on whether 
this approach is reasonable.
    (3) The characteristics of a non-maturity account, not its 
labeling, are important determinates of value. For example, two credit 
unions may have accounts labeled regular shares: the first credit union 
may rarely change the interest rate; in contrast, the second may reset 
the rate frequently, similar to a money market share account at the 
first credit union. What documentation, if any, would be appropriate to 
use ``safe harbor'' assumptions?
    (4) A credit union might choose to use its own empirical analysis 
to demonstrate a risk mitigation value larger than a ``safe harbor'' 
assumption. NCUA examiners would expect a statistically valid empirical 
analysis to justify such values. Should NCUA use the validation 
guidelines addressed in Chapter VIII of the report? If not, please 
provide alternative guidelines you believe are appropriate and provide 
evidence to support your recommendation.
    (5) Is there background information from sources other than those 
covered in the n/e/r/a study that NCUA should consider? Please indicate 
the source of the information and the results. If possible, provide 
complete copies of the studies or the analysis.
    (6) NCUA is contemplating whether to conduct an empirical study of 
credit union non-maturity share behavior. Please provide specific 
recommendations on what should be included in such a study.
    (7) Are there other considerations in the valuation of shares, 
beyond those discussed in the n/e/r/a study, which should be taken into 
account?

    By the National Credit Union Administration Board on December 
13, 2001.
Becky Baker,
Secretary of the Board.
[FR Doc. 02-1682 Filed 1-23-02; 8:45 am]
BILLING CODE 7535-01-U