NCUA Outlines Its Supervisory Priorities for 2023

01/18/2023 CUToday

ALEXANDRIA, Va.–In a new letter to credit unions, NCUA has outlined its 2023 supervisory priorities.

The agency, noting its exam flexibility initiative will continue in 2023, said its primary focus this year will be:

Interest Rate Risk

NCUA noted the “sharp rise” in rates has “amplified market risk” because a credit union’s assets and liabilities do not reprice equally, potentially impacting net economic values and credit unions’ projected earnings, the agency reminded it has issued Letter to Credit Unions 22-CU-09, Updates to Interest Rate Risk Supervisory Framework, and Supervisory Letter 22-01, Updates to Interest Rate  Risk Supervisory Framework, updating the NCUA supervisory framework for IRR.

NCUA further noted that with the April 2022 addition of the Sensitivity to Market Risk, or “S,” component to the CAMELS rating system, the agency has formalized the focus on IRR as a specific rating category separate from liquidity risk.

NCUA also noted additional references for IRR are in the Examiner’s Guide under Workpapers and  Resources.

Liquidity Risk

The Letter to Credit Unions points out that higher interest rates have caused a slowdown in prepayments for some loans and investment holdings, which has resulted in reduced cashflows. Large increases in share balances from “2020−2022 may result in an increased level of share sensitivity and share roll off as market rates continue to rise,” NCUA said. “In evaluating the 'L' component of the CAMELS rating to determine the adequacy of your credit union’s liquidity risk management framework, examiners will consider the current and prospective sources of liquidity compared to funding needs. Examiners will review your credit union’s liquidity policies, procedures, and risk limits. Examiners will also evaluate the adequacy of your credit union’s liquidity risk management framework relative to the size, complexity, and risk profile of your credit union.”

The letter outlines how the agency will assess liquidity management.

Resources and guidance on liquidity risk can be found in the NCUA’s Examiner’s Guide.

Credit Risk

Credit risk is a supervisory priority for 2023 as high inflation and rising interest rates are putting financial pressure on credit union members, according to the agency.

“High inflation and the increasing likelihood of an increase in unemployment rates could negatively impact borrowers’ ability to repay outstanding debt,” NCUA cautioned. “Rising interest rates could also result in higher loan payments for borrowers.”

The agency said its examiners will review the soundness of existing lending programs, any adjustments made to loan underwriting standards and portfolio monitoring practices, and loan workout strategies for borrowers facing financial hardships.

Fraud Prevention and Detection

With NCUA stating fraud risks remain elevated, the agency said it will continue its efforts to review internal controls and separation of duties.

In 2023, NCUA said it will also implement a management questionnaire designed to enhance the identification of fraud red flags, material supervisory concerns, or other potential new risks to which a CU may be exposed.

“This questionnaire will help protect credit unions and reduce potential losses to the Share Insurance Fund,” the letter states.

The questionnaire will be sent to credit unions in the pre-examination planning stage for all full-scope exams along with the Items Needed List, including on joint exams with State Supervisory Authorities (SSAs). Credit unions only need to complete one questionnaire per examination, according to NCUA.

The agency added credit unions will typically receive the questionnaire through MERIT’s survey function, and the credit union CEO or another senior executive will complete, sign, and then return the questionnaire through MERIT’s survey function. Examiners will review the credit union’s responses in the pre-examination planning process to refine the scope of the examination, as appropriate, NCUA said

Additional information can be found on NCUA’s Fraud Prevention Resources page.

Information Security/Cybersecurity

Similarly, NCUA said cybersecurity risks remain a “significant, persistent, and ever-evolving threat to the financial system.”

“Your credit union can protect itself with a cybersecurity program that evolves and adapts to the changing threat environment,” NCUA said.

NCUA said it will continue to have cybersecurity as an examination priority.

“Examiners will evaluate whether credit unions have established adequate information security programs to protect members and the credit union,” NCUA said. “To strengthen the examination process for cybersecurity, the NCUA developed and tested updated Information Security Examination procedures tailored to institutions of varying size and complexity. Examiners will use these new procedures in 2023.”

The agency urged CUs to take advantage of the Automated Cybersecurity Evaluation Toolbox.

Consumer Financial Protection

In the letter NCUA said it will continue to review compliance with applicable consumer financial protection laws and regulations for federal credit unions that the NCUA has under its consumer financial protection supervision authority. “Examiners will continue to review your credit union’s compliance with Flood Disaster Protection Act requirements, including disclosure requirements, as we continue to evolve our understanding of the impact of climate-related financial risk on credit unions, credit union members, and the Share Insurance Fund,” the agency said.

NCUA added examiners will be looking at overdraft programs, Truth in Lending, The Fair Credit Reporting Act, and more.

Other Updates

The NCUA letter also offers an update on implementation of Current Expected Credit Loss (CECL) rules, including the CECL Transition Rule, as well as ACL policies and procedures, adherence to GAAP (if applicable), and more.