The National Credit Union Administration is narrowing its focus to address the risks that are most relevant to credit unions facing an unpredictable economy.
The NCUA released its annual list of oversight priorities last week, placing the risks around Interest rates, liquidity and credit as primary areas of concern for individual credit unions and the agency. The grouping of six core areas this year is a notable decrease from the agency list of 11 key themes in 2022.
Todd Harper, president of the NCUA, explained how the agency refined its approach using examiner feedback and financial changes in the industry to narrow the scope of its docket.
“It’s possible to have too many priorities, so what we wanted to do this year is make sure we focused on those key things based on what we heard from our testers in the field, what we were seeing with changes in the ambient economy, where there were interagency approach issues and where we heard potential complaints,” Harper said.
The NCUA plans to continue outreach and education of examiners on the agency’s new priorities and make minor adjustments to the examination process, while hosting webinars for industry experts interested in learning more about the list.
Anticipating a likely economic slowdown, stemming from the ripple effect between rising interest rates and a similar rise in payment delinquencies, Harper stressed that ongoing credit risk screening and more in-person examinations are essential to preparing savings and credit cooperatives.
“It is important that we return to on-site examinations, as that allows us to [not only] kick the tires and look at the books, but also talk directly to the people inside the credit union where we can often spot problems that we may not see in a virtual environment where people feel more free to come and talk to the examiners along the way,” Harper said.
investigation of a recent Cornerstone Assessors Report found that more than 59% of surveyed credit union leaders chose the interest rate environment as one of their top concerns for 2023, up from 38% in 2022.
Experts who have held past leadership positions within the NCUA and have since founded advisory firms in the industry provided additional insight into the factors that supported the importance of the agency’s focal points.
Mark Treichel, former CEO of the NCUA and CEO of consultancy Credit Union Exam Solutions, explained how the effect of the COVID-19 pandemic on cash balances in member accounts has boosted investment activity, which recently was negatively affected by the increases in interest rates.
“During the pandemic, credit unions got an influx of cash, and that cash never really started to go away… At most credit unions, it just came along and members parked it there, and it was So when some credit unions went out and came in a little bit more on the investment side, followed by a rate hike,” Treichel said. “What’s happened now is they have these investments under water that they have to hold until maturity, which creates some liquidity risk.”
Referring to the role of the Share Insurance Fund, which insures member deposits in federally-backed credit unions up to $250,000, former NCUA board member Geoff Bacino said it’s impossible to totally eliminate risk.
“One of the things that I used to push for when I was on the NCUA board of directors was the idea that the Stock Insurance Fund is called an insurance fund for a reason, which is that it’s an insurance policy,” he said. bacino.
To bolster its campaigns for fraud protection, cybersecurity, and consumer financial protection, which are the second half of the focus areas highlighted by the NCUA, the agency has developed new assessment tools, such as the Information Security Exam for assess the digital progress of an individual institution. in strengthening safeguards.
Ann Petros, vice president of regulatory affairs for the National Association of Federally Insured Credit Unions, explained how a proposed rule to report cybersecurity breaches is part of a suite of tools the NCUA is monitoring for the potential impact on individual organizations.
“Due diligence in any kind of relationship with vendors, so that you understand their cyber security procedures, is paramount… A lot of the concern of institutions, not just credit unions, but any kind of organization, it’s through third parties,” Petros said. “The proctoring priorities indicate that examiners will use [the Information Security Exam and other] new procedures in 2023, so we look forward to seeing how it works for credit unions and examiners.”
As the agency makes further adjustments to its examination processes, credit union leaders will also make similar changes internally.
“Oversight is now, as perhaps reasonably should emerge from the COVID disruption with higher interest rates and a potential recession looming, the agency’s focus at NCUA,” said Dennis Dollar, former NCUA president and senior partner at Dollar Associates. “As long as it remains reasonable and risk-appropriate, expect increased supervisory scrutiny as the pendulum always swings in both the regulatory and supervisory realms, which are close cousins to each other and boost each other.”
