Interest rate, liquidity, credit risks top NCUA 2023 supervisory priorities

NCUA issued a letter to credit unions (23-CU-01) Wednesday outlining the agency's supervisory priorities and other updates to its examination program for 2023. 

"Our focus will be on the areas posing the highest risk to credit union members, the credit union industry, and the National Credit Union Share Insurance Fund," the letter reads, adding that NCUA will conduct examination and supervision activities "both onsite and offsite, as appropriate."

The letter also notes NCUA's exam flexibility initiative will continue in 2023, which establishes an extended exam cycle for certain credit unions. The agency will also continue its Small Credit Union Exam Program in most federal credit unions with assets under $50 million. For all other credit unions, NCUA examiners will use the agency’s risk-focused examination procedures.

Below are the NCUA’s primary areas of supervisory focus in 2023.

Interest rate risk: Interest rates rose significantly across the yield curve during 2022, elevating interest rate risk (IRR) and the related exposure to earnings and capital. This 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.

Liquidity risk: 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.

Credit risk: High inflation and rising interest rates are putting financial pressure on credit union members. High inflation and the increasing likelihood of an increase in unemployment rates could negatively impact borrowers’ ability to repay outstanding debt. Rising interest rates could also result in higher loan payments for borrowers.

Fraud prevention and detection: Fraud risks remain elevated. As such, the NCUA will continue efforts to review internal controls and separation of duties. In 2023, the agency 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 your credit union may be exposed.

Information security (Cybersecurity): Cybersecurity risks remain a significant, persistent, and ever-evolving threat to the financial system. Credit union technology-related operating environments are increasing in complexity. Credit unions can protect themselves with a cybersecurity program that evolves and adapts to the changing threat environment.

Consumer financial protection: NCUA 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 a credit union’s compliance with Flood Disaster Protection Act requirements, including disclosure requirements, as it 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 letter also provides updates on:

• Current expected credit loss (CECL) Implementation: Credit unions are required to implement the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments – Credit Losses, commonly referred to as Current Expected Credit Loss (CECL) for financial reporting years starting after December 15, 2022. Most credit unions adopted CECL on January 1, 2023.
• Succession planning: The credit union system continues to experience an ongoing trend of consolidation. The NCUA has found that inadequate succession planning is often a reason for credit union consolidations, especially in smaller credit unions. During 2023, examiners will request information about a credit union’s approach to succession planning for senior leaders, including any written succession plan the credit union has established. 
• Support for small credit unions and Minority Depository Institutions (MDIs): In 2023, the NCUA will continue its Small Credit Union and MDIs support program, which the agency implemented in 2022 to support and preserve these credit unions. Credit unions with less than $100 million in assets and MDIs are uniquely positioned to improve the financial well-being of underserved communities by offering their members access to safe, fair, and affordable credit and other financial services and products. 
• Post-examination survey: In 2023, the NCUA will update the post-examination survey to continue obtaining feedback from credit unions on their NCUA examinations.