Interest-rate, liquidity, credit risks top credit union regulator’s 2023 supervisory priorities

The key supervisory priorities of the federal regulator of credit unions in 2023 will include interest-rate, liquidity, and credit risks – according to a letter issued Wednesday – along with fraud protection and detection, information security, and consumer financial protection.

In addition to these top priorities, the National Credit Union Administration (NCUA) Letter to Credit Unions also provides “updates” on the agency’s approach in reviewing credit unions’ implementation of the “current expected credit losses” accounting standard; succession planning; support for small credit unions and minority depository institutions (MDIs); and the post-examination survey.

Announcing the letter via an NCUA Express email, the agency said that it will focus this year on “the areas posing the highest risk to credit union members, the credit union industry, and the National Credit Union Share Insurance Fund (Share Insurance Fund).”

It said the agency will conduct examination and supervision activities both onsite and offsite, “as appropriate.” “Examiners will continue to conduct some examination activity offsite when the activity can be completed efficiently and effectively at credit unions that can accommodate offsite work,” the agency said.

The agency also said it will in 2023 continue its exam flexibility initiative, which establishes an extended exam cycle for certain credit unions. “The NCUA will also continue our Small Credit Union Exam Program in most federal credit unions with assets under $50 million,” it added. It said the agency’s risk-focused examination procedures will apply to all other credit unions.

Here are highlights from the letter:

Interest-rate risk: The agency noted the significant rise in interest rates across the yield curve in 2022, which boosts interest rate risk (IRR) and elevates exposure to earnings and capital. “This sharp rise in rates has amplified market risk because a credit union’s assets and liabilities do not reprice equally, potentially impacting net economic values and credit unions’ projected earnings,” it said.

The letter noted the addition last year of the Sensitivity to Market Risk, or “S,” component to the CAMELS rating system, which formalized the focus on IRR as a specific rating category separate from liquidity risk. Examiners, it said, will review credit unions’ IRR programs for the following key risk management and control activities:

  • Key assumptions and related data sets are reasonable and well documented.
  • The credit union’s overall level of IRR exposure is properly measured and controlled.
  • Results are communicated to decision-makers and the board of directors.
  • Proactive action is taken to remain within safe and sound policy limits.

Liquidity risk: The NCUA said higher interest rates have caused a slowdown in prepayments for some loans and investment holdings, which has resulted in reduced cashflows. “Large increases in share balances from 2020-2022 may result in an increased level of share sensitivity and share roll off as market rates continue to rise,” it said.

“In evaluating the ‘L’ component of the CAMELS rating to determine the adequacy of your credit union’s liquidity risk management framework, examiners will consider the current and prospective sources of liquidity compared to funding needs. Examiners will review your credit union’s liquidity policies, procedures, and risk limits,” the letter states. “Examiners will also evaluate the adequacy of your credit union’s liquidity risk management framework relative to the size, complexity, and risk profile of your credit union.”

Credit risk: Here, the agency pointed to high inflation and rising interest rates, which, it noted, are putting financial pressure on credit union members. It said high inflation and a growing likelihood of rising unemployment rates could negatively impact borrowers’ ability to repay outstanding debt; and that rising interest rates could mean higher loan payments for borrowers.

“NCUA examiners will review the soundness of existing lending programs, any adjustments your credit union made to loan underwriting standards and portfolio monitoring practices, and loan workout strategies for borrowers facing financial hardships,” the agency wrote. “NCUA examiners will carefully consider all factors in evaluating your credit union’s efforts to provide relief for borrowers, including whether the efforts were reasonable and conducted with proper controls and management oversight.”

Fraud protection and detection: The NCUA said it will implement a management questionnaire this year to help identify fraud red flags, material supervisory concerns, or other potential new risks to which credit unions may be exposed, the aim being to help protect credit unions and reduce potential losses to the National Credit Union Share Insurance Fund (NCUSIF).

The agency said the questionnaire will be sent (typically through MERIT’s survey function) to credit unions in the pre-examination planning stage for all full-scope exams along with the Items Needed List, including on joint exams with State Supervisory Authorities (SSAs). “Credit unions only need to complete one questionnaire per examination. If an SSA uses a similar questionnaire, the federal and state examiners will coordinate to decide which questionnaire the credit union will complete to reduce duplication,” it said. It noted that credit unions’ responses in the pre-examination planning process will help examiners refine the scope of the examination, where appropriate.

Information security (cybersecurity): Examiners will evaluate whether credit unions have established adequate information security programs to themselves and their members. The agency in 2023 will use updated Information Security Examination procedures tailored to institutions of varying size and complexity.

Consumer financial protection: Compliance with applicable consumer financial protection laws and regulations, as well as federal flood insurance requirements, remain a focus for examiners. “Examiners will continue to review your credit union’s compliance with Flood Disaster Protection Act requirements, including disclosure requirements, as we continue to evolve our understanding of the impact of climate-related financial risk on credit unions, credit union members, and the Share Insurance Fund,” it said.

Examiners will, the agency wrote, also consider trends in violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements to establish priorities. Areas of focus include overdraft programs; fair lending, including review of residential real estate appraisals for any bias; the Truth in Lending Act; and the Fair Credit Reporting Act, it said.

The agency’s discussion of overdraft programs notes that examiners in 2023 will expand their review of these programs, including website advertising, balance calculation methods, and settlement processes. “The NCUA will also evaluate any adjustments credit unions have made to their overdraft programs to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees,” it wrote.

In an “updates” section of the letter, the agency also points to examiners’ approach in reviewing credit unions’ implementation of the current-expected-credit-loss accounting standard. It said examiners will evaluate the adequacy of credit unions’ allowance for credit losses (ACL) on loans and leases.

NCUA Letter 23-CU-01

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