NCUA Reaffirms Concentrations of Credit Risk a 2019 Supervisory Priority

By January 14, 2019 No Comments

Just like in school where your professor gave you areas to focus on to prepare for your final exam, the NCUA has published guidelines to help prepare you for their exam. Sometimes it is a review of old material and sometimes it is a brand-new concept. In their Supervisory Priorities letter, they discuss the primary areas of focus for 2019 some of which were priorities of 2018 and some are new areas of focus for 2019. Provided below are Cliffs Notes of each area of focus and a cheat sheet version on how best to prepare, all in the best interest to help you ace your final!  

New concepts for 2019

Concentrations of Credit

Cliffs Notes

With the looming thought of an upcoming recession, the NCUA will focus its attention on concentration of credit risk. Having concentration in any one product or service makes a credit union at risk from an ‘event risk’ like the housing market crash in 2008, or industry disruptors like Uber. Concentration risk can be found within asset classes, liabilities, third-party providers (i.e. indirect loan partners) or services provided to other parties. Here is a more detailed look into the basic review procedures for examiners.

Cheat Sheet

The 2008 housing market crash left an indelible mark on our industry. The NCUA priority is to ensure that credit unions are well equipped to handle any ‘event risks’ in the future. Evaluate whether or not concentrations of credit risk exist within your Credit Union and mitigate against creating new concentrations. Document your compliance with clearly defined concentration limits.

Current Expected Credit Losses (CECL)

Cliffs Notes

The Financial Accounting Standards Board (FASB) released Current Expected Credit Loss (CECL) Guidance requiring credit unions to change their current Allowance for Loan and Lease Loss (ALLL) methodology and begin reserving for expected losses over the life of their loan portfolio. Are you making preparations for CECL? Have you analyzed how it would alter your ALLL funding? This will be an area of focus and priority for examiners this year. You can also expect CECL requirements to continue to evolve. The NCUA has provided information on the CECL accounting method.

Cheat Sheet

The allowance for credit loss is one of the most important estimates for a credit union. An important key to making this calculation reliable and meaningful is having accurate inputs into the calculation. This task could be the most challenging for credit unions.

Because of the longer time horizon, all else equal, increases to the reserve will be greater for credit unions with greater credit risk, a growing loan portfolio and longer times to maturity.

Concepts continued from 2018…

Liquidity and Interest Rate Risks

Cliffs Notes

Due to the projected increasing interest rate environment, examiners will focus on your credit unions liquidity and interest rate risk management program. Specifically, in regard to how rising interest rates will affect your net worth, member preference shifts to shares with greater market sensitivity and if you can meet liquidity needs in an environment with greater competition.

Cheat Sheet

A rising interest rate environment can lead to realized losses on asset sales. Don’t forget that a rising rate environment is highly correlated with increases in credit and collateral risk. Increasing rates make homes less affordable for your current members in variable rate products. For new buyers, increasing rates also put downward pressure on collateral positions, leading to increased charge offs and decreased recoveries.

Having a comprehensive interest rate risk management program makes good sense.

Additional priorities continued from 2018 should also be reviewed and are as follows;

While these Cliffs Notes are helpful, reading the whole book is always best. Here you can find Manuals and Guides to help comply with the NCUA guidelines.

So now that you have the cheat sheet, the Cliffs Notes and the book for the final exam, studying should be a breeze. Good luck and happy studying!

-Dinny Lechman
Twenty Twenty Analytics Blogger

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