WASHINGTON — The financial services industry is a risk-takingindustry, NCUA Deputy Director of the Office of Examination andInsurance Tim Segerson told CU Enterprise Risk Managementconference attendees on Monday.

Credit unions that don't take risk can't earn income, whichmakes them a risk to the share insurance fund, Segerson told thegathering at a lunch speaking slot Monday at the Capital Hilton inWashington.

To effectively regulate risk, the NCUA has instructed itsexaminers in its Examination Guide to step back from examination details and keyratios, and think about the big picture, Segerson said. Examinersare also supposed to assess management's ability to correctlyidentify and manage risks.

That marks a long-term trend away from mathematical CAMEL matrices to a more qualitative review, which began in2003 when the NCUA began conducting risk-based exams, Segersonsaid.

Now, examiners implement an enterprise risk management approachin which they review seven risk categories – credit, liquidity, operational, reputation, interest rate, strategicand compliance – and weigh how they fit into the CAMEL matrix.

Examiners don't just expect a credit union to manage currentrisks, but also be prepared to respond to risks of the future.Segerson said he's seen credit unions “time and time again”experience risks that have emerged and grown so quickly, they'vebeen shuttered within 18 months.

Segerson provided the room with a Top 10 list of examiner redflags when evaluating effective risk management. They include alack of commitment to risk management, disengaged leadership,concentrated power over decision making, failure to adhere topolicies and procedures, disproportionately high yields compared torisk, and misaligned incentives.

Paying lending executives on volume without concern to qualityor sustainability will take credit unions down quickly, the examdeputy said. In fact, although he declined to name names, Segersonsaid volume-based incentives were the reason behind a credit unionfailure earlier this year.

The NCUA is working with nine other regulatory agencies to writenew rules that limit incentive-based compensation plans, he added.Those rules are mandated by the Dodd-Frank Act, Segerson said.