Rising Rates Demand NCUA Raise Permissible Interest Rate Ceiling, NAFCU Tells Agency

ARLINGTON, Va.–NCUA should immediately raise the permissible interest rate ceiling to mitigate unnecessary interest rate risks facing federal credit unions, NAFCU told the agency in a letter.

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Vice President of Regulatory Affairs Ann Kossachev urged the agency to establish a floating permissible interest rate ceiling equal to a 15% spread over the prime rate or, alternatively extend the 18% permissible interest rate ceiling for the maximum allowable period of 18 months, no fewer than 90 days before its scheduled expiration on March 10, 2023.

Under the Federal Credit Union (FCU) Act, the trade group noted that the NCUA board, in coordination with Treasury, relevant congressional committees, and other federal agencies, has authority to raise the permissible interest rate ceiling if money market rates have risen over the past six months or if prevailing interest rate levels threaten the safety and soundness of individual federal credit unions.

Attention Warranted ‘Immediately’

“Contemporary economic conditions plainly warrant the NCUA Board’s immediately raising the permissible interest rate ceiling,” wrote Kossachev. 

When the NCUA extended the expiration of the 18% permissible interest ceiling in June of 2021, the federal funds rate rested below 0.1%, as did each of the one-month, three-month, six-month and one-year Treasury rates. Between the start of 2022 to today, the federal funds rate has more than tripled to 0.33%.

The FOMC also announced in March that it would begin reducing its balance sheet, which quickly led to the increase of the prime rate by 25 basis points to 3.5%. The Federal Open Markets Committee last week also bumped up its baseline rate by 50 basis points.

“Against this backdrop of rapidly rising key interest rates, thousands of individual federal credit unions across the country face a wide range of material risks to their well-being,” Kossachev noted. “However, few contemporary risks, if any, are as dire as the elevated and accelerating risks to federal credit unions’ earnings.”

Floating Rate Recommended

Kossachev strongly encouraged NCUA to establish a floating permissible interest rate ceiling equal to a 15% spread above the prime rate, noting that the adoption or maintenance of any fixed rate ceiling “leaves the credit union system unnecessarily exposed to all too obvious interest rate risks.”