Harper: ‘Credit Risk Has Heightened’

NCUA Chair Todd Harper said with economists predicting a slowdown late this year, the agency is keeping a closer eye on heightened credit risks, “especially in the commercial real estate market.”

The NCUA has expanded its commercial real estate monitoring efforts to include closely scrutinizing loan performance, conducting risk assessments and scenario analysis based on loan exposures, developing enhanced review procedures for credit unions with elevated risk profiles, and undertaking targeted reviews at higher risk credit unions.

Harper, speaking at a meeting of the National Association of State Credit Union Supervisors (NASCUS) in Nashville Sunday, said the NCUA worked with other federal banking agencies in consultation with state regulators to issue an interagency policy statement on Prudent Commercial Real Estate Loan Accommodations and Workouts in June.

A CU Times analysis of NCUA data showed credit unions held $118.8 billion in commercial loans backed by real estate as of March 31, or 8.8% of total loans, rising steadily from 6.4% in March 2019. Commercial loans not backed by real estate was $10.9 billion in March, or 0.7% of total loans — a proportion that has held steady over the past four years.

The NCUA also distributed a letter to credit unions last month reiterating the importance of liquidity risk management and contingency funding plans, which can include membership in the NCUA’s Central Liquidity Facility and access to the Federal Reserve’s discount window.

“The high levels of interest rate risk we are seeing can also increase a credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and put pressure on earnings,” Harper said.

“Ultimately, the volatility of the current interest rate, economic and commercial real estate environments underscore the need for credit union executives, managers and boards to remain careful in managing the potential risks on their balance sheets, and vigilant in monitoring economic conditions and the interest rate environment,” he said.

Harper said the NCUA will soon consider whether to implement an alternating examination program with NCUA and state regulators. NASCUS supported a pilot program launched in 2019, and worked with the NCUA to develop a list of lessons learned from the experiment involving regulators in California, Florida, New Hampshire, Oklahoma, South Carolina and Texas.

Harper said it is important for federal and state regulators to work together to identify and reduce risks to credit union soundness.

“While we cannot predict whether another financial institution will make headlines for all the wrong reasons in the months ahead, we can work together to maximize the credit union system’s preparedness and resilience for such contingencies,” Harper said.

“That collaborative spirit between the NCUA and the states will be greatly needed as the U.S. financial sector faces growing threats due to poor risk management at some financial institutions and rising economic concerns for the balance sheets of all credit unions,” he said.