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Nov. 30, 2018

Council lists key risk principles
in tailoring examination plans

Tailoring examination plans and procedures based on risk -- and key principles for gauging that risk – are both addressed in a second update issued by the Federal Financial Institutions Examination Council (FFIEC) this week, as the next step of the council’s exam modernization project.

The council (made up of NCUA, the three federal banking agencies, and the State Liaison Committee (SLC), which includes NASCUS representative Idaho Department of Finance Deputy Director Mary Hughes) said in a release that using risk as a guide in tailoring exams is “another area that holds promise” for reducing regulatory burden. The exam council said that its member regulators have identified and developed “common risk tailoring principles and practices” and that its members are “each committed to issue reinforcing and clarifying examiner guidance to their examination staffs on these risk-focused examination principles if necessary.”

The principles include:

  • Recognizing there are financial institutions, or areas within institutions, that present low risk, and in those cases, minimum examination procedures are generally sufficient to assess the institution’s condition and risks.
  • Allocating more examination resources to higher risk areas and fewer resources to lower risk areas.
  • Using data from the quarterly call report filings to monitor changes to the institution’s business model, complexity, and risk profile between examinations.
  • Leveraging available information, including analyses and conclusions from ongoing offsite monitoring and previous examinations to determine the financial institution’s risk profile and the scope of the next examination.
  • Considering the financial institution’s ability to identify and control risks when risk-focusing examinations.
  • Tailoring the pre-examination request list to the institution’s business model, complexity, and risk profile.
  • Contacting institutions between examinations or prior to finalizing the scope of the examination to help inform an examiner’s assessment of an institution’s risk profile.
  • Following up between examinations on institutions’ actions taken to address areas in need of improvement.

Along those lines, the exam council listed six “community financial institution examination risk-focusing practices” that are (or will be) guiding examiners:

  • Consider the unique risk profile, complexity, and business model of the institution when developing an examination plan.
  • Analyze existing information such as Call Report data, publicly available information, and confidential supervisory information to help identify areas of higher and lower risk when planning examinations.
  • Monitor financial institutions between examinations.
  • Tailor the document request list based on the financial institution’s business model, complexity, risk profile and planned scope of review.
  • Apply examination procedures in a way that reduces the level of review of low risk institutions or low risk areas.
  • Discuss financial conditions, risk profiles, new or expanded business lines, and pertinent new supervisory or regulatory information with institution management prior to finalizing the scope of review.

“Examiners will generally discuss the examination plan and its rationale with institution management at the beginning of the examination,” the exam council said.

LINK:
FFIEC Emphasizes Risk-Focused Supervision in Second Update of the Examination Modernization Project


FED REPORT: FINANCIAL SYSTEM ‘STABLE’ WITH SOME VULNERABILITIES

The financial system is relatively stable, but debt levels of businesses at historic highs and signs of deteriorating credit standards are among potential vulnerabilities, according to the Federal Reserve’s first report on the condition of the national structure issued this week. In its 46-page Financial Stability Report (the first of what the Fed has said will be semiannual reports on the stability of the nation’s financial system), the central bank outlines four areas of potential vulnerabilities to the overall system. The Fed said it is monitoring those four areas as they are “aspects of the financial system that are most expected to cause widespread problems in times of stress.”

Of the four, only the report’s evaluation of “excessive borrowing by businesses and households” showed any vulnerabilities. “Borrowing by households has risen roughly in line with household incomes,” the report states. “However, debt owed by businesses relative to gross domestic product (GDP) is historically high, and there are signs of deteriorating credit standards.”

The three other areas of vulnerabilities the Fed said it is monitoring – elevated valuation pressures, excessive leverage within the financial sector, and funding risks – are all within acceptable ranges, the Fed report indicated.

The report also outlined three “near-term” risks to the financial system: “Brexit” (the United Kingdom’s withdrawal from the European Union) and euro-area fiscal challenges; problems in China and other emerging market economies; and trade tensions, geopolitical uncertainty, or other developments.

LINK:
Federal Reserve's inaugural Financial Stability Report


FORMER KS REGULATOR TAKES SEAT ON FED BOARD

There are now officially five members of the Federal Reserve Board with the swearing in Monday of the newest member, Michelle W. (“Miki”) Bowman. Two seats remain open on the seven-member board. The Fed said Monday that Bowman took the oath of office administered by Fed Chairman Jerome H. (Jay) Powell in the board room at the Fed’s Washington headquarters. Bowman, a former Kansas State Bank Commissioner, was nominated April 16 by President Donald Trump to fill the remainder of a 14-year term that ends in 2020. She is from a community banking family and is herself a former banker, the Fed has said; she will hold the “community banker” seat on the board.

Two seats on the Fed Board remain unfilled, although the White House has submitted nominations for both (which are pending in the Senate). The nomination of Marvin Goodfriend has been awaiting a final Senate vote since February. The other nominee, Jean Nellie Liang, still awaits a hearing before the Senate Banking Committee.

However: The Senate is scheduled to adjourn, sine die, Dec. 14 – giving both nominations scant time to advance further. The same is true for the nomination of Rodney Hood to be a member of the NCUA Board (who also has not had a hearing before the Banking Committee). If the Senate does not act before it adjourns – either on its target date or later, but before the new Congress takes over in early January – the nominations of all three will be returned to the White House, essentially ending the nominations unless the president resubmits them for consideration in the new Congress.


NOMINATION OF NEW BCFP DIRECTOR MOVES FORWARD

Meanwhile, a final vote to confirm Kathleen (“Kathy”) Kraninger for a five-year term as the next permanent director of the Bureau of Consumer Financial Protection (BCFP, formerly known as the CFPB) will likely happen next week, but not before Tuesday. The Senate voted to cut off debate Thursday on Kraninger’s nomination on a tight, party-line vote of 50-49. Although her nomination to succeed John (“Mick”) Mulvaney as head of the bureau is likely to pass next week (perhaps on an equally tight vote), some Democratic senators were urging all of their Senate colleagues to vote against confirmation in a final vote.


NCUA NAMES NEW CHIEF ECONOMIST; MONACO TO RETIRE

Andrew Leventis, most recently the deputy chief economist for the Federal Housing Finance Agency (FHFA), will become the new chief economist for NCUA beginning Dec. 10, the agency announced this week. Leventis will succeed Ralph Monaco, who has been NCUA’s chief economist since 2015. Monaco is retiring at the end of the year following seven years with the credit union agency (the first four as a senior economist) and more than 26 years in public service, the agency said. Leventis has been with the FHFA since 2005. NCUA noted that prior to his government service, he had extensive private-sector experience as an economist and decision engineer. He holds master’s and doctoral degrees in economics from Princeton University and a bachelor’s degree in quantitative economics from Stanford University, it said.

LINK:
Press release: NCUA Selects Leventis as Chief Economist


ITO: ‘STRONG RELATIONSHIPS’ WITH REGULATORS VITAL FOR CU SUCCESS

The importance for credit unions of strong relationships with their regulators, and the necessity of parity for state- and federally chartered institutions, were underscored by NASCUS President and CEO Lucy Ito in a recent article published in a credit union trade publication. In the article, which focused on the work by one Michigan state credit union to work with its state regulator to respond to changes in local law regarding investments in government sponsored enterprises (GSEs), Ito noted that it never hurts for a credit union to have a good relationship with its regulator. “If there is a good relationship there, it is certainly good for the regulator to know the credit union is well managed in their assessment of a request,” she said. She also pointed out that the credit union’s experience shows the importance of parity between the credit union charters. She noted that 44 states have parity provisions in their codes. “It is important to make sure the federal charter and state charter provide a competitive check on one another. If a state gives an authority that the [National Credit Union Administration] does not and is able to test it, then the NCUA can look and say, ‘That makes sense,’” Ito said. “And vice versa.”

LINK:
CU Journal: One Michigan credit union’s push for parity with federal charters (subscription required)


ON THE ROAD: MA mortgage lending session focuses on key rules

Understanding critical regulations affecting mortgage lending – including those related to the Community Reinvestment Act (CRA), Home Mortgage Disclosure Act (HMDA), Fair Housing Act, Equal Credit Opportunity Act (ECOA) and others -- were the center of presentation and discussion at the NASCUS Mortgage Symposium held this week in the Needham, MA. Thanks to speaker Michael Christians, Regulatory Compliance Counsel with Michael Christians Consulting, LLC. NASCUS and the Massachusetts Division of Banking worked closely together on the program, with the MDB providing their staff with professional development training through the program. For 2019, NASCUS is planning a full schedule of education sessions; see our website for more information (including about registration and agendas).

LINK:
NASCUS 2019 Education Agenda


BRIEFLY: Work proceeds on tweaking tax bill

NASCUS is working with other credit union groups this week advocating for provisions in proposed legislation that would eliminate taxes on fringe benefits for non-profit and not-for-profit organizations (including credit unions). The provisions in H.R. 88, the Retirement, Savings, and Other Tax Relief Act proposed this week by House Ways and Means Committee Chairman Kevin Brady (R-Texas), if enacted, would eliminate unrelated business income tax (UBIT) on not-for-profit transportation and athletic facilities fringe benefits. The taxes were imposed by the tax reform legislation that went into effect late last year (the Tax Cuts and Jobs Act of 2017 (TCJA)). However, the provisions do not address taxes on executive compensation.


Information Contact:
Patrick Keefe, pkeefe@nascus.org