Dear Board of Directors and Chief Executive Officer:
As a regulator and insurer, NCUA’s goal is a strong, safe credit union system. To that end, NCUA continues to incorporate lessons learned and feedback from credit unions into our examination approach.
As we begin 2013, federally insured credit unions continue to exhibit positive trends in most key financial indicators. At the same time, credit unions continue to evolve and face various economic and operational challenges. Thus, NCUA’s supervisory focus for 2013 is to improve the capacity of both NCUA and credit unions in managing risk. In addition, NCUA will continue providing more clarity in guidance to examiners and credit unions and consistency in agency practices.
Examiners will evaluate your credit union’s capacity to manage risk in the following areas:
A. Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Two primary areas where examiners will focus on operational risk in 2013 are:
Technology – Credit unions are adopting new technology to meet evolving member service needs and to leverage automation for increased efficiencies. Remote deposit capture, online banking, mobile banking, and social media are just a few examples of new technologies credit unions are increasingly employing to serve members. If your credit union adopts such new technologies, you need to implement controls commensurate with the risks involved, in particular ensuring the security and stability of these service delivery channels.
Internal Controls – A sound system of internal controls is essential to ensure your credit union is operated in a safe manner, consistent with your board’s approved policies and procedures. An effective system of controls deters and mitigates the risk of fraud, errors, and other operational problems. Also, you need to provide for a strong supervisory committee and audit function that is commensurate with the size and complexity of your credit union.
B. Balance Sheet Management
As you know, credit unions serve members by taking in deposits and using these funds to make loans or investments. This management of the credit union’s balance sheet involves maturity and risk transformation, which generates earnings the credit union can retain to build net worth (capital) as a cushion against unexpected losses.
By taking well-planned and managed risks, credit unions maintain financial health and preserve member service. However, excessive or ineffectively managed maturity and risk transformation strategies ultimately create problems for members and the credit union community as a whole through losses to the National Credit Union Share Insurance Fund. Thus, examiners in 2013 will focus on the ability of your credit union to generate adequate earnings without adversely increasing the following risks in particular:
Interest Rate and Liquidity Risk – Examiners will evaluate your credit union’s ability to mitigate interest rate and liquidity risk, especially where there are high levels of long-term assets funded by short-term, less stable funds. This evaluation will include how your credit union has modeled its earnings, capital, and liquidity performance under stressed scenarios.
Examiners will also review your credit union’s contingency funding plans in light of changes in the corporate credit union network and Central Liquidity Facility access. Where the CLF was the credit union’s sole or primary source of contingent liquidity, your credit union needs to act to re-establish a reliable contingency funding arrangement. Your credit union’s actions in this regard will be a key consideration in examiners’ evaluation of the liquidity component (“L”) of the CAMEL rating. Credit unions can draw from the principles contained in the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management, which focused attention on several aspects of a sound liquidity management program, including corporate governance, documented strategies, risk tolerances, and reporting.1
Concentration Risk – Too much of a “good thing” can still lead to problems. When there is limited diversification of assets, examiners will evaluate your credit union to determine if excessive levels of concentration risk exist and work with management to incorporate strategies to mitigate this risk.2
Less Established Products – Some credit unions invest in less established or complex products, such as private student loans or investments associated with credit union-funded employee benefit programs that would otherwise be impermissible. If your credit union invests in less established or complex products, examiners will verify whether your credit union has the appropriate expertise and risk-mitigation controls over such products with which credit unions have historically had limited experience.
NCUA is working on several fronts to improve information and guidance for examiners and credit unions. In 2013, NCUA plans to publish enhanced guidance in such areas as:
Member Business Lending (MBL) – NCUA plans to issue a supervisory letter to add clarity to the process and expectations for MBL rule waiver requests. This letter will address, in particular, waivers for personal guarantees and blanket waivers versus individual loan waivers for aspects of the MBL rule. The guidance will also focus on appropriate underwriting and credit monitoring systems for MBLs.
Examiners appropriately vary examinations based on each individual credit union’s risk profile and business lines. At the same time, NCUA is committed to providing credit unions nationwide with examinations that are based on consistent application of principles and procedures. NCUA continues to work on improving such consistency in areas like the use of Documents of Resolution and application of the new National Supervision Policy Manual.
In addition, based on feedback from credit unions, we have modified the way we communicate information about how to contact NCUA and appeal exams as follows:
Pre-examination Letter – The AIRES program examiners use to conduct exams includes a new template for the pre-examination planning letter that will include information on how to contact the NCUA supervisory examiner and examiner assigned to your credit union, as well as identifying any other NCUA personnel that are expected to participate on the exam.
Examiners will work diligently with you to maintain a sound and healthy credit union that can safely adapt to members’ changing needs. NCUA will continue to listen to feedback and look for ways to further enhance our approach to examining and supervising insured credit unions.
If you have any questions related to this letter, please contact NCUA’s Office of Examination and Insurance at 703-518-6360 or EIMail@ncua.gov
1 Also see Letters to Credit Unions 00-CU-13 dated December 2000, 01-CU-08 dated July 2001, 03-CU-11 dated July 2003, and 10-CU-14 dated August 2010.
2 See Letter to Credit Unions 10-CU-03 dated March 2010.
3 Approved at the December 2012 NCUA Board meeting.
4 Approved at the July 2012 NCUA Board meeting.