ALEXANDRIA, Va.-NCUA's implementation of the risk-focused exam and the more flexible exam cycle has allowed the Office of Examination and Insurance to breathe just a little easier. Over the last 10 years, the number of problem credit unions has been on a general decline. In 1993, NCUA was supervising 387 CAMEL 4 credit unions and 14 CAMEL 5s, according to NCUA data. By 2003, those numbers dropped to 207 CAMEL 4s and 10 CAMEL 5s. The numbers have fluctuated some, NCUA Director of Examination and Insurance Dave Marquis noted, but they have been downward overall. He said that he is not expecting any dramatic improvement in those numbers in the near future as interest rates are just beginning their gradual climb back upward. Part of the reason for the decline in troubled credit unions is the evolution of their capabilities over time. "We're a lot more sophisticated than we were in the 80s with ALM modeling," Marquis explained. He added that some credit unions need to "get real" about their assumptions within the model or it's not worth doing from a practical standpoint. Additionally, NCUA is better able to marshal its resources since the risk-focused examination and extended examination cycle were implemented. "The great thing about examiners is they see a collective view. They see the good and bad from various credit unions," Marquis said. This is a good knowledge base from which to suggest models, he said. With the risk-based examination, "credit unions are realizing earlier if they can survive in the marketplace," which is a tough decision for a credit union to make, Marquis noted. It also places additional pressure on the credit union, he said, if credit union management knows their examiner will go away, or at least visit less often and for a briefer period, if the credit union is handling things appropriately. Training of the subject matter examiners, covering issues like capital markets and specialized lending, was a big change for NCUA that became effective at the same time in order to be able to better scrutinize which credit unions needed more or less examination. Marquis projected it will take the "next two years to compliment the risk-focused examination to its entirety." While credit unions' business has become more complex, it also allows for greater diversification, which helps keep the CAMEL 4s and 5s down. "Credit unions have more diversifications so the likelihood of them failing is less and less over time," Marquis said. Also, as a practical matter, Marquis pointed out that at a time when there were 700 CAMEL 4s it was much more difficult to keep track of all of them. With just a few hundred it's a lot easier to resolve them faster, he said. Being able to focus additional resources on a CAMEL 4 faster than before may also help save more of those teetering on the brink of perishing. It is NCUA's job to resolve the credit unions' issues at the least possible cost to the insurance fund, Marquis stressed, so CAMEL 4s are given some leeway to change their direction. CAMEL 5s are either liquidated or merged with another credit union, which also typically costs the insurance fund money, Marquis said. -

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