Office of Examination and Insurance
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Transcript of Office of Examination and Insurance
Office of Examination and InsuranceAbout E&I and Our Look
Forward06/06/2013
Tim SegersonOffice of Examination and Insurance
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May 23, 2013
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NCUA Office of Examination and Insurance
Division of Risk Management
Division of Supervision
Division of Data and Analytic
Services
Division of Credit and Capital Markets
Central Liquidity Facility
NGN Oversight Work Group
Larry FazioDirector
Tim SegersonDeputy Director
Monitors System Risk,
Oversees Enforcement
and Assistance Activities,
Monitors and Measures
NCUSIF and TCCUSF reserve
needs
Oversees Exam Program, Resource
management, and exam policy and regulation Primary FFIEC
interface
Performs analysis of data, develops and manages models,
manages and maintains data
systems (CU Online, FPR) Responsible for
all official data releases, field
support and training in advanced
information security
NGN Oversight Committee
E&I Director Chairs NGN Oversight Committee
E&I Director President of NCUSIF
Administrative Staff
Specialized review and
analytics for capital markets,
liquidity and credit risk; field
support, technical training in
capital markets and advanced credit markets
Monitors, values and handles all valuation, forecasting and assessment
levies for NGN program and stabilization fund. Audits, validates
third party research and security market issue maintenance
Separate CLF Operation and
Staff
DCCM Director - President CLF
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E&I
DOS
DRM
DDAS
DCCM
NGN
CLF
The Alphabet Soup of E&I
All things Risk Related incl. NCUSIF and Stab. FundCentral Liquidity
Exam Policy & Program Oversight
Guaranteed Note Oversight and Reporting
Capital and Credit Market Specialists – Field Support
Data Systems, Reporting, and Financial Analysis – ISO Field Support
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What E&I Does
Recent Enhancements• Exam Report Cover – Contact
Info.• NSPM• SCUEP• Guidance and Rulemakings
– TDR– Waivers– Derivatives– IRR
Some Things In the Works• Supervisory Guidance:
– Benefits Plans– NRSROs– Private Student Loans– ERM
• Exam Improvements– DOR Consistency– Continued Bifurcation
Capacity, Clarity, Consistency
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• Capacity – Examiners will evaluate capacity to manage Operational
Risk and Balance Sheet Risk. • Clarity
– NCUA will work to improve guidance for examiners AND credit unions.
• Consistency– Use of Documents of Resolution (DOR’s)– National Supervision Policy Manual– Exam Procedures
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Forces Driving ChangeMarketplace
Technology
• Information Security
• Mobile Access• Innovation• “Leap-Frog"
Technologies
Competition
• Overlapping FOMs
• Non-bank financial institutions
• Economies of Scale
• Investment and Loan Products
Regulatory Environment
• CUMAA, 1998• Gramm-Leach-
Bliley, 1999• Basel III, 2006• Dodd-Frank,
2010
Accounting Standards
• Business Combinations
• Fair Value Accounting
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The Big Picture Change is Inevitable
For NCUAIndustry evolution/rising stakes dictates nimble, transparent and forward looking strategies – NCUA for 2020
• Changing employee demographics• Changing CU demographics• Changing market place• Changing Technology
For Credit UnionsMarket/Technology Will Drive Strategies – Evolve or Suffer the Consequences
• 3 C’s in Force• Sound Operational Controls• Balance Sheet Management• Self Sufficient Liquidity
Management
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Changing Balance Sheet
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Increasing Long Term Assets and Non-core Shares
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0
$100
$200
$300
$400
$500
$600
$700
$800
$900 Shares (in billions)
Drafts Regular IRA Other Non-Member MM CDs
Non-Core = 52% of Shares
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0
$50
$100
$150
$200
$250
$300Long Term Assets (in billions)
Fixed Assets Land & Building NCUSIF depositInv. > 3 years Loans > 5 years
NLTA = 19% of Assets
56% of shares26% of
Assets
Can increasing balance sheet exposure become the next crisis in credit unions?
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4/30/1971 4/30/1974 4/30/1977 4/30/1980 4/30/1983 4/30/1986 4/30/1989 4/30/1992 4/30/1995 4/30/1998 4/30/2001 4/30/2004 4/30/2007 4/30/20100%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
9/30/1981; 18.16%
3/31/2000; 8.24%
6/30/2008; 6.32%
2/28/2013; 3.53%
Average Monthly Mortgage Rates 1971 - PresentSource Freddie Mac
Average Median
1971 - 2013 8.65% 8.15%
2003 - 2013 5.38% 5.71%
30 yr Fixed Mortgage Rate Statistics
FISCU Operating Expenses (3.18%)
Cost of Funds (0.73%)
Avg. Costs before PLLL = 3.89%3.89% > 3.53%
Locking in 30 yrs.? At these rates?
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Balance Sheet Exposure of LICUs
Dec-2009 Dec-2010 Dec-2011 Dec-2012 Mar-201305
10152025303540
16.80 16.10 17.30 17.49 18.50
19.80 19.28 20.45 18.75 19.56
LICUs have more ST Cash
Cash/ST ALL FICU Cash/ST All LICU
Dec-2009 Dec-2010 Dec-2011 Dec-2012 Mar-20130
1020304050607080
36.12 38.10 40.50 42.74 44.36
46.02 47.36 49.99 49.05 50.77
LICUs have More Core Type Shares
FICU Reg Shrs/Drafts LICU Reg Shrs/drafts
Dec-2009 Dec-2010 Dec-2011 Dec-2012 Mar-201305
10152025303540
31.50 32.98 32.42 32.89 33.45
26.59 28.24 27.98 29.75 30.63
LICUs have Fewer LT Assets
FICU NLTA LICU NLTA
• LICU slightly better positioned for rising interest rates
• ST margin shortfalls will reverse quickly for conservative shops
• Greater share pricing flexibility
Operational Risk
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New Risks Require Enhanced Internal ControlsOld Risks require strong controls
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• Fraud losses cost the industry the most of all the failures (sometimes several multiples of reported assets)
• Internal controls, risk mitigation, and oversight– No substitution for controls– Multiple review levels can mitigate but not replace– Independence
• Strong effective audit process• Internal audits• Oversight
Operational Risks – Fraud Hot Spots
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• Poor Accounting Controls/Un-reconciled Books– Clean Records and Effectively Monitoring Financial Activity
• Unrecorded shares– Segregate activity/access control– Monitor bank activity
• Fictitious and Fraudulent Loans – New loans, Charge off loans, Due Dates, Subsidiary vs Control Account.
• Un-cleared Overdrafts– Bank Reconcilements, general ledger reviews, access controls/override reports
• Dormant/inactive share accounts– Timely monitoring and clearing inactive accounts– Control reports
• False Expenditures– Unsupported expenditures– Budget/financial statement monitoring
Risk Management is Key
10 DO’s
1. Commitment to make tough choices.
2. Forward looking strategy.
3. Well developed and integrated risk management.
4. Balanced appetite for risk (like your life depended on it).
5. Incentives aligned with sustainable risk levels (Taking a long term strategic view).
6. Continuous monitoring and strong comprehensive reporting regime (Good, Bad or Ugly).
7. Strong control environment.
8. Balanced portfolio and portfolio strategy.
9. Equal weight to the downside risks in the decision making process.
10. Optimal capital deployment (Scaled to level of risk and no over-reliance).
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Good Risk Management fosters vigilance in times of calm and instills discipline in times of crisis.Dr. Michael Ong
Examination 2013: What to Expect
10 Don’t’s
1. Lack of commitment to risk management.
2. Disengaged leadership.
3. Concentrated organizational power.
4. Inconsistent or weak process for complexity or risk level.
5. Failure to adhere to policies and procedures.
6. Appetite “creep” (Don’t rationalize – make the touch decision).
7. “Silver Bullets” and “Shiny Objects” (aka shortcuts).
8. Disproportionate yields = unidentified risk (there are no hidden secrets if you have not identified the risk – stop until you can see, measure and control it)
9. A state of denial (The truth of the matter is that you always know the right thing to do. The hard part is doing it. -Norman Schwarzkopf )
10. Misaligned incentives (poorly designed pay and incentive plans
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Three Credit Union Profiles
Small
Mid-Sized
Large
$50 Million
$250 Million
4,515 Units - 66.9%$64.4 B in Assets - 6.1%
1,465 Units - 21.7%`$163.4 B in Assets - 15.5%
773 Units - 11.4%$795.1 B in Assets - 78.4%
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LICU = 1,675&
$110.6 B in Assets
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Resource Distribution by Asset Cohort
Share of Assets vs. Share of Exam Hours
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< $50 MM $50 MM - $250 MM
$250 MM - $1 B > $1 B0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
6%
15%
26%
51%
40%
27%
20%
13%
AssetsHours
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What is the point?• Increasing Large Institutions
– Greater sophistication and complexity requires different staffing approaches and exam approaches
– Higher impact to the national NCUSIF • Limited/Scarce Resources
– Stakeholder Value– Consumer/System Protection
Modernization
• Leverage technology to optimize efficiency
• Modernize Regulatory and Supervisory Framework
– Consistency– Flexibility
• Specialization – Rent v Buy– Diversify Oversight/Program Management
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Office Contact Page
Feel free to contact our office with questions or comments.
Primary Staff: Tim Segerson, Deputy Director
Office Phone: 703-518-6397