It’s not just about your assets.
While the NCUA and state regulators certainly care about the raw numbers of credit unions, they are putting more emphasis on scrutinizing how credit unions are run. In other words, the "M" in CAMEL is getting the spotlight.
Among the examples of this trend are the NCUA’s new rules on financial education for board members and efforts by all federal financial regulators to regulate compensation plans that could imperil an institution’s safety and soundness. Also, examiners are paying more attention to risk management practices.
"If an institution doesn’t have a proper management structure in place to manage risks, regulators are coming down harder than they have before," said Tom Hinkel, director of compliance for Safe Systems Inc., which provides consulting on technology and other compliance areas for financial institutions. "Examiners aren’t just looking at existing contracts and investments but are placing more emphasis on how and why the institution made the decision in the first place."
He said he is amazed at how many financial institutions he has worked with don’t have proper channels set up to track risk-assessment decisions and how often senior executives and boards aren’t informed about decisions at the departmental level.
Hinkel also said many management problems–and subsequent concerns by examiners–could be prevented if credit unions made more effective use of committees that oversee key parts of their operations, such as technology and lending practices. These panels should have standard agendas that cover the full range of the institution’s activities under their purview, he advised.
The NCUA and some state regulators have issued guidance on performing due diligence.
In a letter the agency sent in late December, it urged credit unions to perform thorough due diligence to determine their risk exposure from using corporate credit unions compared to using third-party firms.
The letter advises credit unions to have policies that define their level of risk tolerance. In addition, when deciding on a payment service provider, credit unions should evaluate the monitoring costs. This includes staffing, capital expenditures and technological investment.
NCUA Chairman Debbie Matz has emphasized the correlation between better run credit unions and lower assessments.
"The amount of the assessments for the National Credit Union Share Insurance Fund really depends on the industry’s own performance," Matz said in a speech at NAFCU’s annual convention last summer in Chicago. "The level of assessments is a direct result of the decisions that you make, as executives and board members, in conducting your business."
Some of the agency’s initiatives aimed at improving the quality of those decisions haven’t been met with resounding enthusiasm.
Under a rule approved by the NCUA board in December, within six months of joining an FCU’s board, volunteers would have to develop a level of financial proficiency, which includes basic finance and accounting proficiency. This training can be done by credit union employees, outside sources or, in the case of small credit unions, the NCUA’s Office of Small Credit Union Initiatives.
The agency said its goal is to ensure that directors understand if the value of a line item is changing over time and what the significance of that change is. The director must also understand the CU’s activities and the potential risks and benefits.
In the letter, Matz emphasized that the agency’s goal is not to "increase examiner scrutiny of the financial skills of particular directors. Rather, examiners will evaluate whether the credit union has a policy in place to make available the appropriate training to enhance the financial knowledge of the directors."
The agency issued the rule in the wake of material loss reviews by its inspector general of several failed credit unions, which indicated that in several instances senior executives and board members were either unaware of potential risks or knew about the risks and ignored them. CUNA and NAFCU both objected and said it would add to the regulatory burden facing credit unions. However, they are now offering training to volunteers to comply with the regulation.