alt exams jwg presentation - nascus meeting · phase 1-alternating exams phase 2-improved...

Alternating Examinations

Joint NCUA-State Supervisor Working Group

August 2017

Pre-decisional

Larry Fazio, Director

Office of Examination and Insurance

NCUA FISCU Program

� Coordinate with SSA where possible.

� NCUA will examine FISCUs every 8 to 12

months from prior exam completion that are:

– Greater than $1 billion in assets;

– CAMEL 4 or 5 greater than $50 million; or

– CAMEL 3 greater than $250 million.

� NCUA will examine all other FISCUs at least

once every five years.

2

Joint Working Group

3

• Established by October 2016 NCUA Board

approval of Exam Flexibility Initiative Report

(recommendation #5).

• To evaluate and recommend further changes

to examination program for federally insured,

state-chartered credit unions.

Joint Working Group

4

• Goal to minimize burden on FISCUs from separate regulator and insurer.

– Collaborate to improve coordination and scheduling of joint exams, provide scheduling flexibility, and reduce redundancy where possible.

– Evaluate the efficacy, appropriateness, and feasibility of adopting an alternating examination approach for FISCUs.

• No specified timeframe or expiration of working group.

– Multi-year project.

Joint Working Group Members

5

� NCUA Members� Larry Fazio, Examination & Insurance Director

� Cherie Freed, Region V Regional Director

� Myra Toeppe, Region III Regional Director

� Lynn Markgraf, Region I Associate Regional Director Programs

� State Supervisory Authorities• Harold Feeney, State of Texas

• Dudley Gilbert, State of Oklahoma

• Chris Myklebust, State of Colorado

• Steve Pleger, State of Georgia

• Kim Santos, State of Wisconsin

� National Association of State Credit Union Supervisors� Brian Knight, Executive Vice President & General Counsel

Joint Working Group

6

• Identify and recommend options to address any issues that could positively impact the shared examination of FISCUs.

Phase 1 - Alternating exams

Phase 2 - Improved coordination of joint exams and other aspects of supervision program

Phase 3 - Other areas (e.g., incident response, loan participations, third party vendors) where better coordination would be beneficial

• Seek broad stakeholder input.

Joint Working Group

7

• Identify and reinforce what works well.

• Identify and address what can be improved.

• Promote more reliance on each other’s work.

• Explore process improvements and technology to increase coordination and reduce burden.

• Address any training needs.

• Discuss and attempt to remedy any organizational culture or other issues hindering better cooperation (e.g., NCUA as a competing charterer).

Some Initial Research(see Appendix for more information)

8

• FFIEC and FDIC Related– FDI Act Sec 10(d) and 12 CFR 337.12

– FFIEC Guidelines for Relying on State Examinations (1995)

– Agreements protocols

• CAMEL Variances

• Examiners onsite

• State law, regulation, and policies on:

– Accepting NCUA exams

– Accepting CPA audit in lieu of exam

– CAMEL ratings (“S”, changing rating, disclosure to institution etc.)

– Examination cycle

Some Initial Thoughts

9

• General need to update operating agreements.

• Guiding Principles for relying on other party’s work

• Need to account for variability amongst states.

• Definition of alternating examination program

– 3 main variations with multiple permutations regarding

eligible institutions

– Pilot program

• Joints exams still needed. Scheduling still an issue. Pre-

exam planning, request lists, specialists, who’s in charge,

handling disagreements.

• Examination scope and standards

Some Potential Benefits

10

� Better leverage unique skills and perspective of

both agencies

� Optimize NCUA and SSA resources

• Less individual exam coordination needed – operate based

on established protocols

• Less duplication and overlap

• Reduced unhealthy conflict

� Streamline the examination process for credit

unions

• Minimize duplication and overlap

• Less staff onsite

• Single point of contact for credit union for a given exam

Some Possible Challenges

11

� State law

� Budgets, resources, expertise

� State adaptation to reliance on NCUA exams

� Potentially more variability from exam to exam for credit

union

� Adapting exams to meet the needs of the other agency*

� Change Management

Note: Working group plans to conduct focus groups and seek

stakeholder input to identify as broadly as possible relevant

considerations.

* Examples include the “S” rating, escheating, CRA, consumer compliance exams, investment authority,

conflicts of interest, MBL rules, fixed asset rules, board education requirements, and board

compensation.

PHASE 1

Alternating Examination Pilot*

12

*Pre-decisional. Subject to NCUA Board authorization.

Shared Examination Program

13

1. Joint examinations every 8 to 12 months from prior exam completion

for:

– FISCUs with CAMEL composite 4 or 5 rating greater than $50 million in

total assets as of most recent calendar year end.

– FISCUs with CAMEL composite 3 rating greater than $250 million in

total assets as of most recent calendar year end.

2. Joint examinations for all other FISCUs with a CAMEL composite rating

of 3, 4, or 5, and FISCUs otherwise of supervisory concern, NCUA

determines it needs to participate in examining in a given calendar year

(no less than at least once every 5 years).

3. Eligible for alternating exam program* - all other FISCUs with a CAMEL

composite rating of 1 or 2 and not otherwise of supervisory concern

(NCUA will participate in examining at least once every 5 years).


Joint Exams

14

• NCUA and the state conduct exam.

• State leads the exam and write and issues the report, with any

supplements to the report provided by NCUA.

– To the extent possible, the state coordinates with NCUA to develop

the scope of the examination and avoid duplication of review areas.

– The state and NCUA coordinate the sharing of examination

responsibilities and ensure the team is composed of necessary

resources and expertise from the state and NCUA. NCUA’s

participation is primarily for insurance risk areas.

– The state is responsible for compiling the items request list to

include all the items requested by NCUA, organized so it is not

repetitive.

– All examination-related work documents are shared.

Alternating Exam Options

15

Eligible FISCUs

Assets as of most recent calendar yearend.

Alternating Alternating with

Limited

Participation

Alternating

Lead

Joint

(State as Lead)

Assets > $1B: Every 8 to 12 months from prior

exam completion

□** □** □ □

Assets $500M to $1B

Every other exam

Every third exam

Once every 5 years

□

□

□*

□

□

□*

□

□

□

□

□

□

Assets $250M to $500M

Every other exam

Every third exam

Once every 5 years

□

□

□*

□

□

□*

□

□

□

□

□

□


Every other exam

Every third exam

Once every 5 years

□

□

□*

□

□

□*

□

□

□

□

□

□


Every other exam

Every third exam

Once every 5 years

□

□

□*

□

□

□*

□

□

□

□

□

□

Assets < $50M

Every other exam

Every third exam

Once every 5 years

□

□

□*

□

□

□*

□

□

□

□

□

□

*NCUA would conduct or lead these examinations with the state accepting the examination report in lieu of

conducting its own examination. **These alternating options for these FISCUs is subject to NCUA Board approval.


16

1. Alternating• NCUA and the state alternate conducting exams.

• The agency responsible for conducting a given examination (based on the alternating cycle) plans and conducts the examination, and issues report.

• Agency conducts exam in a way that meets the needs of the other agency so it can accept the examination report in lieu of conducting an examination itself.

• There is no direct involvement from the other agency in the examination (except perhaps attending final meeting with credit union board).


17

2. Alternating with Limited Participation• NCUA and the state alternate conducting exams.

• The other agency only has limited direct involvement, typically only for

maintaining a presence (such as one or two staff) on the examination to have

direct knowledge of issues identified and to participate in key meetings and

discussions.

– In some cases, limited involvement can include the other agency being assigned to

review a discrete area, such as some requirement specific to that agency or because

that agency has the necessary expertise to review a particular aspect of the credit union.

• The agency responsible for conducting a given examination (based on the

alternating cycle) plans and conducts the examination, and issues report.

• Agency conducts exam in a way that meets the needs of the other agency so

it can accept the examination report in lieu of conducting an examination

itself.


18

3. Alternating Lead• NCUA and the state jointly conduct exam, with responsibility for leading the

exam and writing and issuing the report alternating between the agencies.

– Issuing the report means providing the examination report to the credit union

as the issuing agency’s work product, with any supplements to the report

provided by the non-lead agency.

– To the extent possible, the state and NCUA develop the scope of the

examination to avoid duplication of review areas.

– The lead agency is responsible for compiling the items request list to include all

the items requested by the non-lead agency, organized so it is not repetitive.

– All examination-related work documents are shared.

– The state and NCUA coordinate the sharing of examination responsibilities and

ensure the team is composed of necessary resources and expertise from the

state and NCUA.

Phase 1 – Pilot Alternating Exams*

19

� Preparations in 2017

o Identify states willing and able to participate.

o Identify corresponding suitability for NCUA regions (e.g., staff,

workload).

o Enter into pilot program agreement .

– Option to pilot and which FISCUs to include. Goal is meaningful coverage

across asset spectrum and at least one of each options piloted.

– Transition plans, processing procedures, monitoring and feedback mechanism.

– Cover one full alternating cycle – about three years

o Communicate with affected stakeholders.

o Train examiners.

� Launch in 2018


Phase 1 – Pilot Alternating Exams*

20

States that have Volunteered to Participate in Pilot

State Region Alternating Exam Option

California 5 Option 1; open to all for pilot

Colorado 4 Options 1 or 2

Florida 3

Oklahoma 4 Option 1; possible asset limitation

Texas 4 Option 2 or 3 combination likely


PHASE 2

Coordination of Other Shared

Supervision

Alternating Examinations Joint Working Group 21

Phase 2 – Coordination

22

Collaborate to improve coordination and scheduling of

joint exams and reduce redundancy where possible.

� Issues:

• Scheduling

• Request Lists

• Examination Disagreements

• Other…

PHASE 3

Other Issues

23

Phase 3 – Other Issues

24

� Incident Management Coordination

� Information Coordination Among Participants• Secure Portals (NCUA and States)

� Technology and Systems• Next Generation AIRES

• Call Report

• CUSO

• Vendor Reviews

• Databases

� Other…

Appendix

25

History of FDIC Exam Cycle1978 12-month examination schedule (International Banking Act of

1978)

1991 18-month examination schedule for banks with <$100 million in

total assets (FDIC Improvement act of 1991)

1994 18-month examination schedule for banks with <250 million

(Riegle Community Development and Regulatory Improvement

Act of 1994)

2007 18-month examination schedule for banks with <$500 million

(Public Law 109-473)

2016 18-month examination schedule for banks with <$1 billion

(Fixing America’s Surface Transportation Act of 2015)

26

FAST Act

27

Fixing America’s Surface Transportation Act (P.L. 114-94)

• Revised Section 10(d) of the Federal Deposit Insurance

Act

• Increased the asset size of smaller banking institutions

which would qualify for 18-month examination cycle

� Banks with assets up to $1 billion (from $500 million)

� Banks with assets up to $200 million (from $100

million) qualify with less stringent criteria

FDI Act Sec 10(d) , slide 1 of 3

28

(1) IN GENERAL – The appropriate Federal banking agency shall, not

less than once during each 12-month period, conduct a full-scope, on-

site examination of each insured depository institution

(2) EXAMINATIONS BY CORPORATION - Paragraph (1) shall not apply

during any 12-month period in which the Corporation has conducted a

full-scope, on-site examination of the insured depository institution.

(3) STATE EXAMINATIONS ACCEPTABLE - The examinations required by

paragraph (1) may be conducted in alternate 12-month periods, as

appropriate, if the appropriate Federal banking agency determines

that an examination of the insured depository institution conducted by

the State during the intervening 12-month period carries out the

purpose of this subsection.

FDI Act Sec 10(d), slide 2 of 3

29

(4) 18-MONTH RULE FOR CERTAIN SMALL INSTITUTIONS – Paragraphs (1), (2) and (3)

shall apply with “18-month” substitutions for “12-month” if—

(A) the insured depository institution has total assets of less than

$1,000,000,000 [previously $500,000,000]

(B) the institution is well capitalized, as defined in section 38;

(C) when the institution was most recently examined, it was found to be well

managed, and its composite condition –

(i) was found to be outstanding; or

(ii) was found to be outstanding or good, in the case of an insured

depository institution that has total assets of not more than

$200,000,000 [previously $100,000,000];

(D) the insured institution is not currently subject to a formal enforcement

proceeding or order by the Corporation or the appropriate Federal banking

agency; and

(E) no person acquired control of the institution during the 12-month period

in which a full-scope, on-site examination would be required but for this

paragraph

FDI Act Sec 10(d), slide 3 of 3

30

(9) STANDARDS FOR DETERMINING ADEQUACY OF STATE EXAMINATIONS - The

Federal Financial Institutions Examination Council shall issue guidelines

establishing standards to be used at the discretion of the appropriate Federal

banking agency for purposes of making a determination under paragraph (3).

(10) AGENCIES AUTHORIZED TO INCREASE MAXIMUM ASSET AMOUNT OF

INSTITUTIONS FOR CERTAIN PURPOSES - At any time after the end of the 2-

year period beginning on [September 23, 1994], the date of enactment of the

Riegle Community Development and Regulatory Improvement Act of 1994, the

appropriate Federal banking agency, in the agency's discretion, may increase

the maximum amount limitation contained in paragraph (4)(C)(ii), by

regulation, from $200,000,000 (previously $100,000,000) to an amount not to

exceed $1,000,000,000 (previously $500,000,000) for purposes of such

paragraph, if the agency determines that the greater amount would be

consistent with the principles of safety and soundness for insured depository

institutions.

12 CFR 337.12, slide 1 of 2

31

(a) GENERAL - The Federal Deposit Insurance Corporation examines insured state

nonmember banks pursuant to authority conferred by section 10 of the Federal Deposit

Insurance Act (12 U.S.C. 1820). The FDIC is required to conduct a full-scope, on-site

examination of every insured state nonmember bank at least once during each 12-month

period.

(b) 18-MONTH RULE FOR CERTAIN SMALL INSTITUTIONS – The FDIC may conduct a full-

scope, on-site examination of an insured state nonmember bank at least once during each

18-month period, rather than each 12-month period as provided in paragraph (a) of this

section, if the following conditions are satisfied:

(1) The bank has total assets of less than $1 billion (previously $500 million):

(2) The bank is well capitalized as defined in 325.103(b)(1) of this chapter;

(3) At the most recent FDIC or applicable State banking agency examination the

FDIC-

(i) Assigned the bank a rating of 1 or 2 for management as part of the

bank’s composite rating under the Uniform Financial Institutions Rating

System (commonly referred to as CAMELS); and

(ii) Assigned the bank a composite rating of 1 or 2 under the Uniform

Financial Institutions Rating System

12 CFR 337.12, slide 2 of 2

32

(b) 18-MONTH RULE FOR CERTAIN SMALL INSTITUTIONS – continued…

(4) The bank currently is not subject to a formal enforcement proceeding or order

by the FDIC, OCC or the Federal Reserve and

(5) No person acquired control of the bank during the preceding 12-month period

in which a full-scope, on-site examination would have been required but for this

section

(c) AUTHORITY TO CONDUCT MORE FREQUENT EXAMINATIONS. This section does not limit

the authority of the FDIC to examine any insured state nonmember bank as frequently as

the agency deems necessary.

CAMEL Variance Data – December 2016

33Only FISCUs with different NCUA and SSA Ratings are considered.

Exams Completed Compared to FISCUs

34

The percentage is the number of exams completed compared to the number of FISCUS in each state

States’ Ability to Accept NCUA Exams

35

States’ Use of “S” in CAMEL

36

Does Not Use S

Uses S in CAMELS

WY

WV

WI

WA

VT

VA

UT

TX

TN

SD

SC

RI

PA

OR

OK

OH

NY

NV

NM

NJ

NH

NE

ND

NC

MT

MS

MN

MO

MI

ME

MD

MA

LA

KYKS

INIL

ID

IA

HI

GA

FL

DE

DC

CT

COCA

AZAR

AK

AL

States’ Exam Cycles

37

0

5

10

15

20

25

30

35

40

AK AL AZ CA CO CT FL GA IA ID IL IN KS KY LA ME MD ME MI MN MO MS MT

# o

f M

on

ths

State Law Policy Practice

States’ Exam Cycles (con’t.)

38

0

5

10

15

20

25

30

35

40

NC ND NE NH NJ NM NV NY OH OK OR PA RI SC TN TX UT VA VT WA WI WV

# o

f M

on

ths

State Law Policy Practice

NCUA Involvement in FISCUs by Exams

39

0

10

20

30

40

50

60

70

80

90

0

20

40

60

80

100

120

140

160

180

200

AK AL AZ CA CO CT FL GA IA ID IL IN KS KY LA MA MD ME MI MN MO MS MT

20

16

NC

UA

On

site

sp

er

Sta

te

# o

f F

ISC

Us

#FISCUS 2016 NCUA Onsite

NCUA Involvement in FISCUs by Exams (con’t.)

40

# of FISCUs# of FISCUs

0

5

10

15

20

25

30

35

40

45

50

0

20

40

60

80

100

120

140

160

180

200

NC ND NE NH NJ NM NV NY OH OK OR PA RI SC TN TX UT VA VT WA WI WV

20

16

NC

UA

On

site

sp

er

Sta

te

# o

f F

ISC

Us

#FISCUS 2016 NCUA Onsite

NCUA Involvement in FISCUs by Hours

41

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0

20

40

60

80

100

120

140

160

180

200

AK AL AZ CA CO CT FL GA IA ID IL IN KS KY LA MA MD ME MI MN MO MS

% o

f To

tal

Exa

m H

ou

rs b

y N

CU

A

# o

f F

ISC

Us

AXIS TITLE

#FISCUS % of Total Exam Hours by NCUA

NCUA Involvement in FISCUs by Hours (con’t.)

42

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0

20

40

60

80

100

120

140

160

180

200

MT NC ND NE NH NJ NM NV NY OH OK OR PA RI SC TN TX UT VA VT WA WI WV

% o

f To

tal

Exa

m H

ou

rs f

or

NC

UA

# o

f F

ISC

Us

#FISCUS % of Total Exam Hours for NCUA

alt exams jwg presentation - nascus meeting · phase 1-alternating exams phase 2-improved...

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