WASHINGTON — The financial services industry is a risk-taking industry, NCUA Deputy Director of the Office of Examination and Insurance Tim Segerson told CU Enterprise Risk Management conference attendees on Monday.

Credit unions that don't take risk can't earn income, which makes them a risk to the share insurance fund, Segerson told the gathering at a lunch speaking slot Monday at the Capital Hilton in Washington.

To effectively regulate risk, the NCUA has instructed its examiners in its Examination Guide to step back from examination details and key ratios, and think about the big picture, Segerson said. Examiners are also supposed to assess management's ability to correctly identify and manage risks.

That marks a long-term trend away from mathematical CAMEL matrices to a more qualitative review, which began in 2003 when the NCUA began conducting risk-based exams, Segerson said.

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

Examiners don't just expect a credit union to manage current risks, 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've been shuttered within 18 months.

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

Paying lending executives on volume without concern to quality or sustainability will take credit unions down quickly, the exam deputy said. In fact, although he declined to name names, Segerson said volume-based incentives were the reason behind a credit union failure earlier this year.

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

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NCUA Examiners Taking a Qualitative, Not Quantitative, Approach to Risk Evaluation: Onsite Coverage

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