NCUA’s 2024 Supervisory Priorities Includes 5 Big Areas of Focus

The NCUA released its list of 2024 Supervisory Priorities on Monday. The list included five overall areas of concern and focus for the agency. The five areas, listed in order by the NCUA, include the following:

1. Credit Risk.
2. Liquidity Risk.
3. Consumer Financial Protection.
4. Information Security (Cybersecurity).
5. Interest Rate Risk.

The supervisory letter from NCUA Board Chairman Todd Harper, published Monday, outlined the priorities as “areas posing the highest risk to credit union members, the credit union industry, and the National Credit Union Share Insurance Fund.”

Harper laid out detailed explanations behind each of the five supervisory priorities:

Credit Risk: “Economic conditions continue to change the credit risk environment in the credit union industry, as inflation, high interest rates and borrowing costs, declining savings levels, and the end of pandemic-era stimulus and relief programs have negatively impacted some members’ ability to repay their debts,” Harper wrote.

He added, “NCUA examiners will review existing lending programs’ soundness and credit union risk management practices, including any adjustments a credit union made to loan underwriting standards, portfolio monitoring practices, modification and workout strategies for borrowers facing financial hardships, and collection programs.”

Liquidity Risk: “Credit unions will need to maintain strong liquidity risk management in 2024, due to increased uncertainty in interest rate levels and economic conditions. Pressure in deposit pricing and the use of wholesale funding is accelerating as alternative funding options, while new lending, participations, and loan sale markets may slow,” the letter stated. “Member behaviors and risk relationships are also changing, thus requiring a greater focus on forecasting assumptions, forward-looking cash flows and risk projections. The combined effect creates liquidity challenges and increased risk to earnings and capital.”

Harper said examiners will continue to assess liquidity management by evaluating the following:

• The effects of changing interest rates on the market value of assets and borrowing capacity.
• Scenario analysis for liquidity risk modeling, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts).
• Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds).
• The cost of various funding alternatives and their impact on earnings and capital.
• The diversity of funding sources under normal and stressed conditions.
• The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

Consumer Financial Protection: “The NCUA will continue assessing federal credit unions’ compliance with applicable consumer financial protection laws and regulations,” Harper wrote. “To determine areas of supervisory focus, the NCUA considers trends in violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements.”

In 2024, examiners will focus on areas related to:

• Overdraft programs.
• Fair lending.
• Auto lending, including review of indirect auto loans.

Information Security (Cybersecurity): “The evolving cybersecurity threat landscape poses persistent risks to credit unions. As credit union technology-related operating environments become ever more complex, it is crucial to establish a cybersecurity program that can adapt and evolve to counter these threats effectively,” the letter stated.

The NCUA will prioritize this area as a key examination focus. “Examiners will continue to assess whether credit unions have implemented robust information security programs to safeguard both members and the credit unions themselves,” Harper wrote. Examiners will continue to utilize the information security examination procedures in 2024, according to the NCUA.

Interest Rate Risk (IRR): “The tightening in U.S. monetary policy over the past two years has increased the importance of IRR management at credit unions,” Harper wrote. “The higher interest rates continue to amplify market risk in asset and liability repricing mismatches and the overall management of IRR.”

According to the NCUA, examiners will review a credit union’s IRR program for the following key risk management and control activities:

• Key assumptions and related data sets are reasonable and well documented.
• Back testing and sensitivity testing of the assumption set.
• The credit union’s overall level of IRR exposure is properly measured and controlled.
• Results are communicated to decision-makers and the board of directors.
• Proactive action is taken to remain within safe and sound policy limits.