Treliant’s Credit Solutions practice comprises former senior financial services risk executives and regulators who combine their extensive experience, qualifications, and know-how to assist financial institutions navigate today’s volatile market environment. We provide financial institutions consulting support on credit risk management and governance, liquidity and treasury management, portfolio management, climate scenario analysis, loan workouts, advice on portfolio risk-mitigation strategies due to IRR volatility.
The National Credit Union Association (NCUA) has released its 2023 supervisory priorities, revealing interest rate risk (IRR), liquidity risk, credit risk, and fraud risk as the top areas of focus for the agency.
The NCUA has identified the elevated interest rate environment as one of the key priorities for 2023. The NCUA maintains this elevated interest rate environment poses a material risk to credit unions as a “…sharp rise in rates has amplified market risk because a credit union’s assets and liabilities.” The NCUA also highlighted the addition of the Sensitivity to Market Risk component to the CAMELS rating system and capital as the elevated interest rate environment poses a threat to earnings and capital. NCUA emphasizes interest rate risk is separate from the liquidity risk a credit union may face.
In September 2022, the NCUA issued Letter to Credit Unions 22-CU-09, Updates to Interest Rate Risk Supervisory https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/updates-interest-rate-risk-supervisory-framework and Updates to the NCUA supervisory framework for IRR Supervisory Letter 22-01, Updates to Interest Rate Risk Supervisory Framework https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/updates-interest-rate-risk-supervisory-framework-0.
Credit risk is also a NCUA supervisory priority as high inflation and rising interest rates are pressuring the members of credit union. High inflation may result in an increase in unemployment rates that may negatively impact credit union borrowers’ ability to repay outstanding debt. Rising interest rates may also result in higher loan payments for borrowers. NCUA examiners will “review the soundness of existing lending programs, any adjustments your credit union made to loan underwriting standards and portfolio monitoring practices, and loan workout strategies for borrowers facing financial hardships”. In addition, the NCUA also shared updates on several topics, including the transition to the new current expected credit losses (CECL) accounting standard, noting the NCUA’s new CECL transition tool. Note that CECL implementation if dependent on asset size of the credit union.
Fraud prevention and detection is a new priority for NCUA this year. The NCUA will implement a management questionnaire designed to enhance the identification of fraud red flags, material supervisory concerns, or other potential new risks to which a credit union may be exposed.