Office of Examination and Insurance

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Office of Examination and Insurance About E&I and Our Look Forward 06/06/2013 Tim Segerson Office of Examination and Insurance

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Tim Segerson Office of Examination and Insurance. Office of Examination and Insurance. About E&I and Our Look Forward 06/06/2013. The Alphabet Soup of E&I. Exam Policy & Program Oversight. All things Risk Related incl. NCUSIF and Stab. Fund. Central Liquidity. - PowerPoint PPT Presentation

Transcript of Office of Examination and Insurance

Page 1: Office of Examination and Insurance

Office of Examination and InsuranceAbout E&I and Our Look

Forward06/06/2013

Tim SegersonOffice of Examination and Insurance

Page 2: Office of Examination and Insurance

NFCDCU Baltimore 2013 2

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

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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

NFCDCU Baltimore 2013

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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

NFCDCU Baltimore 2013

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

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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

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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

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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

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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

[email protected]

Office Phone: 703-518-6397