Credit unions were more concerned about interest rate risk thantheir banks counterparts in 2013, according to a recent report fromresearch firm Aite Group.

The report, Top U.S. Lenders Tackle Risk and ITChallenges: Not Their First Rodeo, was based upon a 2013follow-up survey among lenders who participated in 2011 lendingsurvey by Aite. That first survey asked about the lenders' mostpressing concerns, which at the time included managingtroubled portfolios, portfolio growth and regulatoryuncertainly.

To gauge if some of those same lenders had similar or differentchallenges, Aite conducted the 2013 survey designed to discover howthe 2013-to-2014 plan was progressing and what the lenders' visionwas for 2014 and 2015.

While all the lenders surveyed had the same top concern ofcompliance and regulatory risk, the credit union respondentsexpressed more unease “with the addition of more and moreregulations, demands to respond quickly, and the challenge to maketightened deadlines than in the inconsistency of interpretation andunreasonable demands made by regulators that troubled banks,” saidChristine Pratt, Aite senior analyst.

“Banks and credit unions differed a bit on some others as well.Credit unions found interest rate risk to be very challenging whilemost banks not quite as much,” Pratt said.

Likewise, banks also spoke about the effect that rising rateswould have on distressed home equity line of credit portfolios ormortgage refinances in particular, but credit unions saw risingrates as inhibiting their ability to entice credit customers toleave their banks such as in refinancing autoloans, for example, Pratt noted.

“Credit unions also found credit risk to be more challengingthan the banks did and concern about reputation risk was lower inbanks as well,” Pratt said. “Credit unions also saw more of achallenge in systemic risk from internal causes than in externalfraud from denials in service for example that have plagued thebanks.”

According to the Aite report, credit executives in both theconsumer and small-to-midsize business segments continued thestruggle to grow portfolios against immoveable foes. Pratt saidthat is to say that the economy, regulations and a variety of otherrisks continue as potent or even potentially dangerous challengesto the survival of the U.S. financial ecosystem.

Since 2008, regulated financial institutions' earnings havereflected heavy interest income losses on credit portfolios, theAite report read. Retail credit balances declined more than $1trillion by 2013 from the 2008 high of $13.7 trillion. More than70% of loan balances continued to reside in the troubled realestate portfolios such as mortgages and HELOCs. Indeed, nearlyevery type of loan portfolio has lost significant balances. Newloans often came in at lower interest rates than did mature loans,further diminishing portfolio returns.

Read more: Compliance concerns still top list ofchallenges …

In 2011, 72% of the interviewees chose regulations as thebiggest challenge that lending managers were facing, according toAite. By 2013, when most lenders had expected to be moving forward,a full 95% placed compliance and regulations atop the leader board.Interest rate risk, particularly in mortgage and home equityportfolios, ranked second on the challenge list, with 50% ofrespondents finding it very challenging or extremelychallenging.

Aite found that what was apparent for all the credit union andbank participants was compliance remaining a serious challenge, andthey did not see that changing in 2014 or even 2015.The strongestareas of concern frequently mentioned were the uncertainty of finalrules and regulations as well as tight timelines for implementationincluding the Qualified Mortgage rule in the Dodd-Frank Act.

Lenders also worried about the constant requests from auditorsfor data and reports prevented lenders from gathering data fortheir own needs, according to Aite. For most, relationshipmanagement is also becoming critical, Pratt said, adding they wantto know how customers prefer to be contacted and what products theyshould price at the individual level. An ongoing lack of ITresources and budget due to concentration on compliance was a bigissue for many respondents.

“What I also see that is troublesome for credit unions is thatnot much concern emerges for small business credit risk,” Prattsaid, looking at the survey results and through continuingdialogues with large and small credit unions. “What is missing forme is a sense of credit union managements' ownershipof smallbusiness loans and business owner members from theperspective of both credit and reputation risk.”

Pratt said too often, she hears that business loan applicationsare passed onto CUSOs notonly for adjudication, but also for servicing and reporting. Creditunion management often has little to no involvement with businessloans, she added.

“What credit unions can take away from banks on this is thatlack of involvement of senior management in significant financialtransactions – think mortgage brokers and large banks – is adisaster just waiting to happen,” Pratt said.

CUNA Mutual Group Chief Economist Dave Colby said the only surethings in 2014 will be what credit unions will do for theirmembers.

“The nation's credit unions are supporting a modest recovery atthe consumer level driven by replacement demand and low interestrates,” Colby offered. “The U.S. economy is moving in the rightdirection and should continue to do so provided the leaders,regulators and agenda-driven rule writers don't mess it up.”

Also making an appearance in the Aite 2013 survey's answersabout the most challenging risks was liquidity risk or the riskthat an institution could aggregate loans in excess of the capitaland reserve account balances necessary to cover itsobligations.

Pratt said several executives are seeing regulatory pressure toconsolidate IT vendors in an effort to contain systemic risk. Forthe most part, this pressure seems to be, at least for the nextcouple of years, a non-starter for lenders, she pointPratt saidseveral executives are seeing regulatory pressure to consolidate ITvendors in an effort to contain systemic risk. For the most part,this pressure seems to be, at least for the next couple of years, anon-starter for lenders, she pointed out. Examples of criticaltypes of systemic risk expected to continue to challenge in 2014and 2015 include denial-of-service attacks and mortgage buy-backs,particularly at large banks that had acquired portfolios orinstitutions.

Other systemic risk concerns included the complexity of ITchange management, an inability to deploy peripheral equipment andauto dealer liquidations, Aite found. Credit unions that ceded toomuch credit and supervisory authority to CUSOs for SME loanswithout strong credit policies in place also were cited.

The Aite survey respondents said they expected external fraud tocontinue to be challenging in 2014 and 2015, including appraisalfraud with mortgages and HELOCs, auto dealers tricking originationadjudication systems, money laundering and foreclosure and othercollections fraud, particularly in equity loans.

One bright spot was while credit executives in 2011 expressed avery high level of concern over the lack of qualified customersamong both consumers and small businesses applying for loans, thelast two years have seen this concern lessen somewhat.