The National Credit Union Administration is narrowing its focus to address the risks that are most pertinent to credit unions facing an unpredictable economy.
The NCUA released its annual list of supervisory priorities last week, placing risks surrounding
Todd Harper, chairman of the NCUA, explained how the agency honed its focus by using feedback from examiners and financial shifts in the industry to whittle down the scope of its docket.
"It's possible to have too many priorities, so what we wanted to do this year is make sure that we were focusing on those key things based on what we were hearing from our examiners in the field, what we were seeing with changes in the economic environment, where there were issues of interagency focus as well as where we were hearing potential complaints," Harper said.
The NCUA plans to continue outreach and education with examiners on the agency's new priorities and make slight adjustments to the examination process, while hosting webinars for industry experts interested in learning more about the list.
In anticipation of a likely economic slowdown, stemming from the domino effect between rising interest rates and a similar increase in payment delinquencies, Harper emphasized that continuous credit risk analysis and more in-person examinations are essential for credit union preparedness.
"It's important that we are returning to onsite examinations as that's allowing us to [not only] kick the tires and look at the books, but also talk directly to people inside the credit union where we can often pick up issues that we may not see in a virtual environment where people feel more freely to come and talk to the examiners along the way," Harper said.
Research from a recent
Experts who held past leadership positions within the NCUA and have since gone on to found advisory firms in the industry provided added insight on the factors that supported the significance of the agency's focal points.
Mark Treichel, former executive director of the NCUA and chief executive of the consultancy firm Credit Union Exam Solutions, explained how the COVID-19 pandemic's effect on cash balances in member accounts furthered investment activity, which has recently been negatively affected by interest rate hikes.
"During the pandemic, credit unions got an influx of cash, and that cash really never started to go away. … In most credit unions, it just came in and the members parked it there, and that's when some credit unions went out and reached a little bit longer on the investment side, followed by the rates going up," Treichel said. "What's happened now is they've got these underwater investments that they need to hold to maturity, which creates some liquidity risk."
Remarking on the role of the Share Insurance Fund, which insures member deposits at 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 I used to strive for when I was on the board of the NCUA was the idea that the Share Insurance Fund is called the insurance fund for a reason, and that is, it's an insurance policy," Bacino said.
To bolster its campaigns for fraud protection, cybersecurity and consumer financial protection — which are the second half of the core areas highlighted by the NCUA — the agency has developed new assessment tools such as the Information Security Exam for evaluating the digital progress an individual institution has made in strengthening safeguards.
Ann Petros, vice president of regulatory affairs for the National Association of Federally-Insured Credit Unions, explained how a
"Due diligence on any sort of vendor relationships, so that you understand their cybersecurity procedures is of utmost importance. … A lot of the concern for institutions, not just credit unions but any sort of organization, is through outside parties," Petros said. "The supervisory priorities do indicate that examiners will be using [the Information Security Exam and other] new procedures in 2023, so we look forward to seeing how that works for credit unions and for examiners."
As the agency pursues further adjustments to its examination processes, credit union leaders will make similar changes internally as well.
"Supervision is now, as perhaps it should reasonably be coming out of the COVID disruption with higher interest rates and a looming potential recession, the agency's focus at NCUA," said Dennis Dollar, former NCUA chairman and principal partner of Dollar Associates. "As long as it stays reasonable and appropriate to the risk, an increased supervisory scrutiny is to be expected as the pendulum always swings in both the regulatory and supervisory arena — both of which are first cousins to each other and drive the other."
