October 23, 2025— On the final day of EasCorp’s annual ALM Academy, representatives of the Commonwealth of Massachusetts Division of Banks’ discussed how credit unions are addressing core financial risks amid shifting economic conditions. Tom Dumont, Regional Field Manager, and Seth Hersey, Supervisory Examiner, Risk Management Unit, described the regulatory approach to interest rate and liquidity risk management, emerging issues, and improvements seen across the industry, providing actionable insights on balance sheet and risk examinations.
Please note: The information below is provided for educational use only and applies primarily to state-chartered credit unions in the Commonwealth of Massachusetts.
The Focus of Examinations
Regulatory examinations continue to emphasize interest rate risk (IRR) and liquidity risk, two areas that significantly influence credit union safety and soundness. Examiners analyze financial trends, prior findings, and NCUA Supervisory Test results to assess whether institutions’ exposure is rising in the current environment. A scoping process defines the level of review required, using tools like the IRR Workbook to gauge market risk, earnings sensitivity, and measurement frameworks.
Managing Interest Rate Risk
The State’s supervision process starts by evaluating balance sheet structure, board governance, and existing risk mitigation strategies. The examiner will look to see that robust measurement systems in place to capture potential exposure under varying rate scenarios, clear alignment between business plans and risk capacity, and supportable IRR mitigation plans.
The Federal Reserve’s first rate cut in the 2024–2025 cycle occurred on September 18, 2024, when it reduced the federal funds rate by 50 basis points to a target range of 4.75%–5.00%. This marked the beginning of the current easing cycle after a period of rate hikes aimed at controlling inflation. The move represented a significant shift in central bank policy, prioritizing employment concerns as labor market conditions showed signs of weakness. Although high interest rate risk persists, it is trending downward, aided by multiple rate cuts in 2024 and 2025. Examiners note growing differences between NCUA Supervisory Test outcomes—which often appear conservative—and internal models that show lower to moderate risk.
Common Weaknesses Found
One year into the new regulatory cycle, the speakers noted several recurring issues for credit unions. While liquidity issues are improving overall, there are common findings related to risk management, including incomplete IRR mitigation plans lacking quantified targets and insufficient stress testing of deposit assumptions. Unsupported policy limits are another weakness on examinations. Hersey encouraged attendees to consider not only their IRR and liquidity policies, but all those that influence the balance sheet and risk landscape. He mentioned, for example, lending and investment policies which may provide a more comprehensive picture to examiners of the credit union’s policy alignment with its risk tolerance.
The speakers communicated the importance of providing your Board and Asset/Liability Committee (ALCO) with sufficient information to both evaluate risk and assess associated policies, and the importance of documenting those conversations in meeting minutes. These gaps can influence overall CAMELS ratings, prompting regulators to encourage stronger governance and transparent communication.
Liquidity Risk and Stress Testing
Our speakers stated that examiners assess both on-balance sheet source of funds—like short-term investments—and off-balance sheet options such as lines of credit. A sound liquidity framework hinges on accurate cash flow forecasts over various time horizons, regular reporting to ALCO and the Board, and well-defined contingency funding plans (CFPs) identifying plausible stress events.
Stress tests help determine “where does liquidity break” in adverse conditions. While most credit unions have increased their liquidity buffers, some are facing instances of increased haircuts or reduced availability on contingent lines of credit.
The Regulatory Outlook
Overall, as noted above, these examiners noted improving conditions across both risk categories. Institutions have refined their risk analytics and enhanced their documentation practices. Still, regulators warn that complacency is risky—market volatility, deposit behavior, and funding cost pressures require continued testing and governance focus.
This evolving supervisory landscape demonstrates regulators’ dual role: enforcing compliance while fostering institutional resilience. As the Division of Banks suggests, the goal is not merely passing examinations but strengthening the frameworks that keep financial institutions stable, adaptive, and trustworthy in an ever-changing market.