What level of interest rate shocks are examiners looking for?
Credit unions should consider several interest rate shock scenarios. The standard industry-wide interest rate shock is a 300 basis point plus/minus shock. This gives examiners a comparison of relative risk against industry standards and others in the industry. Because market interest rates are at historically low levels, the Division of Credit Unions recommends that higher interest rate shocks should be performed to simulate rising interest rates. The maximum positive rate shocks should be at levels that might be achieved in the future. Short term interest rates (Fed Funds) have been between four and nine percent more than 80 percent of the time, since the early 1970’s. Currently, the Fed Funds rate is at 1.75%. Regulators would like to see higher interest rate shocks than 300 basis points, at least in ramping models that go out at a minimum of two years.
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