NCUA official explains ins and outs of risk-based examination

ARLINGTON, Va.-NCUA Director of Examination and Insurance Dave Marquis provided credit unions with some insightful information about the risk-based examination scheduling and risk-based examination via a NAFCU-sponsored audio-conference. NCUA Exam Programs are Changing: Hear what the experts have to say! drew a crowd of more than 100 credit unions curious to discover how the risk-based approach will affect their credit union. As part of agency efforts to streamline NCUA, spearheaded by Chairman Dennis Dollar, the agency has adopted a risk-based examination schedule slated to begin next year. Marquis explained that as credit unions, along with the rest of the financial services industry, continue to consolidate, a new approach is necessary for the agency to mitigate risks to the National Credit Union Share Insurance Fund (NCUSIF). The number of credit unions has dropped from 23,652 in 1970 to 10,316 as of year-end 2000 and has historically dropped 2% each year. The resulting concentration of assets makes risk-based examination a logical solution. Credit union assets have jumped from $198 billion ten years ago to $438 billion by the end of 2000. Eight percent of credit unions took in 88% of the growth, Marquis cited. “As all of you know, we haven’t lost any funds [from the NCUSIF] in many years,” Marquis said. He added that the fund could take several small hits but it could get messy if a larger institution, like $500 million, failed. He noted that in the past 10 years, billion dollar credit unions have jumped from possessing 5% of total credit union assets to 20%. Two key changes would take place inside the agency to adapt to a risk-based policy. First, Marquis said NCUA plans in the future to hire economists and finance majors for the examiner positions, rather than straight accountants, to achieve a more forward thinking view of risks. Additionally, the agency plans to require all senior examiners to specialize in a particular area, such as capital markets, investments, record keeping, fraud detection, and others. “Really, the biggest change with a risk-based examination is how we scope out an exam,” Marquis said. With the new exam policy, NCUA will look at inherent risk, see how the credit union mitigates that risk, and the level of transaction testing necessary, usually depending upon the size of the institution. NCUA worked with officials from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to put together the program and help train the examiners. NCUA is currently piloting the risk-based examination in Regions II and VI, which will last a couple of months. Then agency heads will discuss how to tweak the process and roll out the examiner training in August of 2002. The risk-based examination will come into use at the beginning of 2003. “We’re being cautious not to go too far too fast,” Marquis explained. The agency is not hiring right now and Dollar is looking to reduce its budget by 4%, mainly through the attrition of positions, such as examiners. The risk-based exam and exam schedule are expected to save NCUA thousands of examiner hours. “The risk-based examination schedule is probably where the lion’s share of the savings of NCUA resources in the field will come from,” Marquis said. To qualify for the risk-based examination scheduling, a credit union must have achieved a CAMEL rating of 1 or 2; have a positive return on assets; and greater than 7% risk-based net worth, among other requirements. [email protected]