It Is Time to Consider an 18-Month Examination Cycle

by J. Mark McWatters, NCUA Board Member

There are many things today that do not make sense. Policies from NCUA should not be on that list.

Yet, while there are others, the agency's current official policy, to maintain a 12-month examination cycle even for well-managed federally insured credit unions, does not stand up in light of recent developments and should be revisited sooner rather than later.

Following statutory changes, the federal bank regulators recently issued an interim final rule to revise their approach to allow more well-managed, well-capitalized community banks and savings associations, those with less than $1 billion in assets, to be eligible for an 18-month examination cycle. Prior to this change, banking institutions could be examined every 18 months if they did not have more than $500 million in assets.

Comptroller of the Currency Thomas Curry, who said he had supported this idea for community banks for quite some time, explained that bank regulators had been considering this move:

in the context of the EGRPRA process—the Economic Growth and Regulatory Paperwork Reduction Act requirement that we take a periodic look at regulations that are unnecessary and overly burdensome ... The 18-month examination cycle, which has been limited to institutions with less than $500 million in assets, struck me as an area where we could offer meaningful regulatory relief to a large group of community banks and thrifts with very little safety and soundness risk.

It took congressional permission, though, for the bank regulators to act. To achieve this, the regulators supported efforts, along with community banks, to encourage Congress to authorize the expanded examination cycle in the Fixing America's Surface Transportation Act, which was passed and signed into law by President Obama in December.

In other words, by supporting common objectives, banks and bank regulators helped secure passage of the improved examination-cycle provision.

Unlike the bank regulators, NCUA does not need additional permission to approve a change in the examination cycle. This fact makes it even more disconcerting that NCUA has not officially considered this matter, particularly because NCUA is participating in the EGRPRA review process along with the bank regulators.

Very small credit unions are subject to more flexible exams, and state-chartered credit unions with assets up to $250 million may be subject to a longer examination cycle. Yet as things stand, there is a clear message being sent that many well-managed credit unions do not merit a longer examination cycle because they are riskier than similarly-sized community banks, and are as risky as the largest banks in the country. Does that make sense? Our own examination reports indicate otherwise and clearly support the strength of the credit union system.

NCUA's initial response to the Cooperative Credit Union Association's Paul Gentile, NAFCU and others was to dismiss their request outright. Currently the agency's position is that NCUA has already provided a number of relief measures and the agency needs to give them time to work. Credit unions tell me their burdens still far outweigh any relief.

In a bipartisan effort, Representatives, Frank Guinta (R-NH) and Ruben Hinojosa (D-TX) have urged NCUA to adopt the longer examination cycle, and many of their House colleagues joined their efforts.

This is a positive step, and it brings more attention to this issue. At the same time, Congress should not have to urge the agency to work on fundamental issues, such as the examination cycle.

Of course, we should weigh the implications of moving to a longer examination schedule and have a robust discussion of what subset of criteria could be used to qualify for an extended examination cycle. It is time to begin seriously studying the efficacy of a longer examination cycle to implement not in future years, but this year. It does not make sense for NCUA to delay any longer.