In the credit union system, expanding compliance requirements and increasing complexity of operations have made the work of credit union executives and their examiners more challenging. In an effort to assist the credit union system, NASCUS has prepared the following summary of supervisory priorities for the year. This summary incorporates priorities highlighted in the NCUA's 2013 supervisory focus, released in mid-January as well as additional priorities that NASCUS has gathered directly from state regulators.
Adoption of new technology
As technology continues to change how credit unions and their members interact, state regulators agree with the NCUA that credit union management of new technologies should be a critical examination priority for the next few years. State examiners will be looking for evidence that credit unions are practicing proper due diligence when implementing new technology. It is important to remember that new technologies go beyond accessing technologies such as mobile banking. They apply equally to the use of digital space for branding, such as social media or the offering of new products such as reloadable pre-paid products. All of these uses present technology driven risks that need to be identified, assessed and managed.
Social media is drawing regulatory attention at state and federal levels, and credit unions would be well advised to consider the proposed social media guidance recently published by the Federal Financial Institutions Examination Council. Credit unions must also continue to monitor the ongoing, and in some cases, changing vulnerabilities of their legacy technology.
Balance sheet management
Like the NCUA, state regulators are looking at credit union's ability to manage the balance sheet to ensure that earnings and capital are maintained at appropriate risk levels. Examiners will be looking to credit union management to ensure their credit unions have a well-distributed balance sheet that generates sufficient income to be viable in the long-term without creating undue credit, interest rate and liquidity risk. State regulators understand that effective balance sheet management is challenging today because loan demand is slack and excess liquidity is creating pressure to increase margins by taking on additional risk. That risk may take the form of increased interest rate risk, increased credit risk and funding mismatches. Of course, credit unions must take risks in order to sustain earnings to fund operations and maintain net worth. It is not a matter of eliminating risk from the balance sheet but rather ensuring that credit unions understand their risk profile and have contingency strategies to mitigate risk as appropriate.
Operational risk
State regulators are concerned with operational risk in institutions of every size, shape and level of complexity. However, the operational risk exposure in smaller credit unions with limited resources is of particular concern to many state regulators because there is often lack of staffing for sufficient segregation of duties and internal monitoring. Credit unions can expect increased examiner attention to internal operations in the coming year.
Interest rate risk
IRR was cited as a top concern of state regulators in 2012 and it continues to be a priority for regulators in 2013. Interest rates are at all time lows and have nowhere to go but higher. Credit union balance sheets have IRR exposure (more long-term fixed rate assets vs. long-term liabilities). Credit unions and other financial institutions want to increase yields and margins, and the easiest way to do so is increase the maturities on their assets. And some credit unions don't have the sophistication and processes to effectively monitor, measure and control IRR. State regulators will be looking to make sure the credit unions they supervise have proper procedures in place to manage IRR this year.
Consumer compliance
Like the NCUA, state regulators have numerous supervisory priorities this year. The compliance burden on institutions is at an all time high. State regulators are particularly concerned about credit union's ability to comply with the new consumer protection laws. As a result, consumer compliance will be emphasized more in 2013 in most states. As the Consumer Financial Protection Bureau progresses with its examination work and rulemaking, many states will place greater emphasis on consumer protection compliance and the satisfactory resolution of consumer complaints.
Management
As always, state regulators are looking at how strong management is throughout the credit union. The biggest determinant of a credit union's success is the quality of its management, including the board of directors and supervisory committees. Strong management is needed to develop and implement programs and products that minimize risks while keeping the credit union productive and profitable. This year, state examiners will look closely to management and board effectiveness, including budgeting, strategic plans and performance measures, particularly when a credit union's financial trends deteriorate and its financial health is weak.
Communication and Efficiency
State regulators encourage credit unions to maintain an open and productive dialogue with their examiners. In fact, state regulators are making it a priority this year to communicate complex issues to credit unions boards by using understandable language, whether from the state regulatory office or from the examiner assigned to the state credit union. States will work on continuing to improve their own efficiencies this year as well.
The list above covers the common themes we have heard. In closing, state regulators are committed to continuing a fair, equitable and meaningful examination and supervision process that ultimately benefits credit unions. In our role as the forum of interaction between state regulators and state credit unions on a nationwide basis, NASCUS is working with state regulators to share existing best practices and jointly develop new practices to reduce the overall duration of on-site examinations while maximizing the productivity of the onsite contact with the state credit union.
It will be important for all states to focus on ensuring state-chartered credit unions understand the state's concerns and expectations.
Mary Martha Fortney is the president/CEO of NASCUS.
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