ALEXANDRIA, Va. (6/17/14)--The National Credit Union Administration, responding to a May 22 request from Rep. Jeb Hensarling (R-Texas), has written several insights into reputation risk and how it applies to the NCUA's supervisory activities.
Hensarling, chair of the House Committee on Financial Services, wrote to federal regulators asking for the way reputation risk is used, what data it draws conclusions from and what the effects of a poor rating would mean for a financial institution (News Now May 28). In addition to the NCUA, Hensarling wrote the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
NCUA Chair Debbie Matz acknowledged in her letter that "reputation risk may be difficult to quantify and measure especially in advance of an event," but said it is only one of seven key risks evaluated by the NCUA. Those include: credit risk, interest rate risk, liquidity risk, compliance risk, transaction risk, strategic risk and reputation risk.
Matz also emphasized that reputation risk is not a stand-alone indicator, but is part of a "broad range of other qualitative and quantitative indicators."
As part of the Federal Financial Institutions Examination Council (FFIEC), the NCUA uses the capital, asset quality, management, earnings and liquidity (CAMEL) rating to asses risk on a system-wide basis.
"NCUA does consider reputation risk along with six additional key risks in its supervision of federally insured credit unions and the assignment of CAMEL ratings. All seven risks are interrelated," the letter reads. "After evaluating those risks, an examiner determines the impact the combined risks can have on a credit union's financial and operation resilience in current and prospective terms."
The letter goes on to state that the NCUA does not pursue enforcement of other supervisory action based on reputation risk alone.
"Qualitative factors may learn to high levels of reputation risk. However, NCUA does not force an institution to change its business practices simply on a reputation risk matter," the letter reads. "We instead would address the underlying unsafe and unsound condition contributing to the reputation risk concern."