understanding what’s ahead: regulatory hot topics€¦ · • credit unions with 1 or 2 camel...
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Understanding What’s Ahead: Regulatory Hot Topics
August 2016
Larry Fazio, Director
Office of Examination and Insurance
U.S.CreditUnionIndustryAtaGlance
Federally Insured Credit Unions 5,954 Credit Union Assets $1.24 Trillion
Total Loans $799.5 Billion Median Asset Size $26 million
Credit Union Members $103.7 Million Return on Assets 0.75 Percent
Insured Shares (deposits) $991.6 Billion Net Worth Ratio 10.78 Percent
March 31, 2016
• Average Shares per Member $10,130
• Average Loan Balance$13,818
• Credit Unions with 1 or 2 CAMEL Ratings75.9% Holding 94.9% of Industry
Assets• Loan Growth
6.35 Percent (Annualized)
NCUSIF:• Fund is about $13 billion• Backed by full faith and credit of the United
States
2
CreditUnionTotalAssetsAreGrowing
‐100
100
300
500
700
900
1,100
1,300
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11 13 15
$1.2 trillion
$12.5 billion
3
More Members ‐ Fewer Credit Unions
4
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
# Members # Credit Unions
ConcentrationofAssets
57
28
7 7
1
3033
12
17
8
0
10
20
30
40
50
60
70
< $10M $10‐$50M $50‐$100M $100‐$500M >$500M
2000 2015
4
15
11
35 35
14 4
19
72
0
10
20
30
40
50
60
70
80
< $10M $10‐$50M $50‐$100M $100‐$500M >$500M
2000 2015
Percent of Units Percent of Assets
5
ChangesintheLoanPortfolio
6
2005 and 2015
2005 2015
Credit Card5% Unsecured
5%
New Auto18%
Used Auto20%
1st Mortgage
32%
Other RE15%
Other Loans5%
Credit Card6%
Unsecured4%
New Auto12%
Used Auto21%
1st Mortgage
41%
Other RE10%
Other Loans6%
6.86.3
11.4 11.5
9.9 10.210.9
0
2
4
6
8
10
12
14
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
NetWorth(Capital)Levels
7
ProblemCreditUnionTrends
5.1%
5.6%
3.9%
5.4%
5.4%
0.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CAMEL 4&5 CU % All Cus CAMEL 4&5 CU % Total Shares
8
CreditUnionFailures
683
2,731 163
29
0
20
40
60
80
100
120
140
160
180
‐
500
1,000
1,500
2,000
2,500
3,000
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Failed CUs Shares # Failures
9
‐0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
‐300
‐100
100
300
500
700
900
1,100
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Premium/(Dividend) Equity Ratio
NCUSIFPerformance
NCUSIF Capitalized with 1% Deposit
Transfer to Stabilization Fund
10
1.26
NCUA’sRoleintheCreditUnionSystem
• Administer Titles I, II, and III of the Federal Credit Union Act
– Title I – General Provisions (NCUA and FCUs)
– Title II ‐ Insurance
– Title III ‐ CLF
• NCUA functions as both charterer and insurer (unique)
• NCUA Board manages 5 Funds (Operating, CLF, NCUSIF, Stabilization Fund, CDRLF)
Mission Statement: Provide, through regulation and supervision, a safe and sound credit union system, which promotes confidence in the national system of cooperative credit.
Vision Statement: NCUA will protect consumer rights and member deposits.
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ObjectivesofRegulationforFinancialInstitutions
(e.g., Deposit Insurance Regulations, Flood Act)
Govern Commerce
Law Enforcement(e.g., BSA and OFAC)
Consumer & Investor Protection(e.g., CFPB Regs, Anti‐Fraud laws)
Public Policy(e.g. FOM, authority limits)
Protect Taxpayer
Explicit insurance or implicit backing creates moral hazard
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Awaytothinkaboutmarketdisciplineandgovernmentoversight…
Examination & Supervision
MarketDiscipline Law & Regulation
Contract Law Anti‐Fraud Laws Disclosure Requirements
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NCUA’s2016SupervisoryFocus
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• Interest Rate Risk
• Cyber‐security
– FFIEC Cybersecurity Assessment Tool
• Unauthorized Access to Member Information
– Incident response program (Part 748)
• Bank Secrecy Act
• TILA‐RESPA Integrated Disclosures
• CUSO Reporting
18.8% 20.0%
23.3%
25.3%
26.6%26.3% 26.4%
26.6%
28.4%
30.6%
32.4%
33.8%
34.7%
32.0%
30.7%
28.7%
27.6%
28.0%
28.5%
28.8%
24.7% 24.5%
23.4%
23.8%
24.3%
23.1%
22.4%
21.9%
22.5%
22.4%
21.8% 22.0%
22.3%
21.0%
21.7%
21.3%
20.0%
19.0%
18.8%
18.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Min
or
Tic
k =
1 P
erce
nta
ge
Po
int
MORTGAGE LENDING:CREDIT UNIONS VS. PEER BANKS AND THRIFTS
Net Residential Real-Estate Loans as a Percentage of Assets, 1996-2015December Figures; Federally Insured Credit Unions (FICUs) Only;
Peer Banks/Thrifts Smaller than Navy Federal
Recession
Federally Insured Credit Unions
Peer Banks and Thrifts
DATA SOURCESFederal Deposit Insurance Corporation (Call Reports)National Credit Union Administration (Call Reports)National Bureau of Economic Research
15
IRRSupervision:What’schanging?
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1. Comprehensive update and integration of guidance
2. Updating and streamlining IRR review procedures
Incorporates supervisory approach for addressing IRR with respect to PCA if necessary
Provides enhanced data collection for individual and system‐wide surveillance (outlier monitoring)
3. Updating IRR‐risk thresholds (low, moderate, high and extreme) for post‐shock NEV results
IRR Supervisory Test using net economic value (NEV)
• Data source for larger credit unions to be internal IRR reporting
• Data source for smaller credit unions to be Call Report based
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NEV Supervisory Test – Risk Levels & Thresholds
0‐10% 10‐20% 20‐30% 30‐40% 40‐50% 50‐60% 60‐70% >85%
Post‐Shock
NEV*
Above 7%
4% ‐ 7%
2% ‐ 4%
Below 2%
*Using NMS Premiums of 1%/4%
Risk
Low
Med
High
Extreme
Post‐shock NEV
Above 7%
4% up to 7%
Sensitivity (%)
Post‐Shock IRR Sensitivity (% change from Base)70‐85%
2% up to 4%
Below 2%
Below 40%
40% to 65%
65% to 85%
Above 85%
Low
Moderate
NEV and Post‐
shock
HowdoesRiskRatingaligntoExamandSupervisionApproach?
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Cybersecurity
19
InterconnectivityExpansion
20
CybersecurityAssessmentTool
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Objective
To help financial institutions identify their risks and determine their cybersecurity maturity.
• The Assessment provides institutions with a repeatable and measureable process to inform management of their institution’s risks and cybersecurity preparedness.
Cybersecurity‐ NCUAGamePlan
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Training, training and more training
Training, training and more training
Extensive examination support tools
Extensive examination support tools
Building capacity with experience
Building capacity with experience
Review, revise, retrainReview, revise, retrain
Implement Exam Approach
Implement Exam Approach
March 2016
Third Quarter 2017
Phased Implementation
Cybersecurity
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Initial Training
•March Intro Training
•April Live Training
• June – December Immersion Training
• September Exam Guide Tool and process training
October 2016 – Mar 2017 ‐
•Practice Reviews (exam reviews without formal findings)
• Focus Feedback loop(s)
•Guide/Exam Aid updates
March 2017‐June 2017
•Exam guide update
• Final Policy Approach
• Final Launch Training
Evolutionary Process Takes Time and Repetition
Right size time, procedures, and selection methodology
MoneyServiceBusinesses(MSBs)
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• Bank Secrecy Act (BSA) – Anti‐Money Laundering (AML)
• MSBs include transactional businesses such as check cashers, prepaid card providers, foreign currency dealers, money transmitters, and money orders and travelers checks issuers.
• Enhanced due diligence when high risk of money laundering or terrorist financing.
• “De‐Risking” is changing the landscape.‐ Increasing exposure‐ Small credit unions may be especially vulnerable ‐ Bad actors may be testing credit union AML controls‐ Closer scrutiny by FinCEN
ConcentrationRisk
“As toxicologists say, the dose makes the poison.”‐ Paracelsus
Lethal Doses:• Nicotine – 60 mg• Cyanide – 100 mg• Caffeine – 150 mg• Salt – 12 ounces• Water ‐ 100 ounces• Oxygen – 100% (exposure time varies based on pressure)
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ExamplesofConcentrationRisk
– Assets
– Liabilities
– Vendors
– Services
• Collateral type
• Geographic area
• Non‐traditional terms
• Fixed or variable interest rate
• Underwriting and documentation
• Loans to one borrower or group of borrowers
Concentration Risks within Asset Classes
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Concentration Risk
NCUACQIInitiativesinProcess
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• Enterprise Solutions Modernization
• Specialists
• Improved examiner training
• Update of Examiner’s Guide
EnterpriseSolutionsModernization
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• Technology (AIRES rewrite)• Loan, Investment, Shares and ALM Analytics
• Value added analytics reports available to CUs
• Better coordination in pre‐exam process = less time onsite
• Secure coordination and communication portal
• Call Report
Future process allows more work to be completed pre‐exam.
FutureExaminationProcess
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• Review Prior Exam
• Build Preliminary Scope
• Gather Data• Begin Analysis• Identify Initial
Risk Areas• Finalize Scope
and Tasks
• Perform Exam• Finalize Analysis• Finalize Risk
Areas• Document
Results
Deliver Exam Results
Post‐Exam Supervision
1 2 3 4 5
Proposed Pre‐Exam Offsite Activities
Proposed Exam Onsite Activities
ExaminerWorkforce
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• More Specialists (FTE neutral)
• Update of Examiner’s Guide
• Improved examiner training– New Examiner training
– Core Examiner training
– SME training (in particular lending)
– Communications & Problem Resolution
AssessingCreditRisk
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Environmental Analysis
Environmental Analysis
Analysis of Lending Strategy
Analysis of Lending Strategy
Analysis of Risk Management Methods
Analysis of Risk Management Methods
Analysis of Loan Portfolio
Performance
Analysis of Loan Portfolio
Performance
Select and Review a
Sample of Loans
Select and Review a
Sample of Loans
New Lending Review Process
ExamProcessSeeTheNCUAReport– February2014
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• Examiner training on:― Continuous communication during exam. “No surprises.”
― Develop problem resolution in cooperation with management whenever possible.
― Establish exam working procedures upfront with management.
― Maintain ongoing dialogue throughout year.
• Credit unions should:― Continuous communication, proactively identify concerns and solutions.
“No surprises.”
― Establish exam working procedures upfront with examiner.
― Facilitate access to books and records.
― Maintain ongoing dialogue throughout year. Keep the focus of the discussion on the credit union.
FutureofFinancialServices• Marketplace – Economy, competition Innovative Product Offerings Non‐traditional competitors (peer‐to‐peer, fintech)
• Technology Data Privacy and Security Ease of transferring money Virtual currency
• Consumer preferences Accessibility demands have evolved Mobile Access 24/365 Availability Social responsibility
33
TopFutureRisks
• Interest Rate Risk (IRR)
• Operational Risk
• Business Model limitations
• Game changers
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Larry Fazio, DirectorOffice of Examination and Insurance
703‐518‐6360
ContactInformation