ALEXANDRIA, Va. — NCUA examiners will be focusing on interest-rate risk exposure on balance sheets and will be paying closer attention to cyber security this year, according to Chairman Debbie Matz.
In an exclusive interview with Credit Union Journal, Matz outlined the agency's key initiatives for 2014, including proposed new capital rules that that will likely impact about 200 credit unions, due to the amount of risk on their books.
Credit Union Journal: What can credit unions expect from the agency next year in terms of supervision?
Debbie Matz: We will really focus on interest rate risk and cyber security, those are the top two priorities. In the past year we talked a lot about the fact interest rates are going to rise and credit unions not being prepared.
Well, rates have started to rise, so it's not a matter of when anymore, it's how much. We are concerned there are a number of credit unions, in their search for yield, that have not taken the necessary steps to protect their balance sheets. We will be looking carefully at credit unions in an effort to mitigate the interest rate risk on their books.
CUJ: The agency last year emphasized the importance of CUs improving their cyber security. It appears this year examiners will pay close attention to the steps credit unions are taking to protect their data?
Matz: We hope to get credit union officials attuned to the fact cyber security is an ongoing issue with demands that are changing all the time. Credit unions really need to stay on top of this issue, which means working with experts outside the credit union and not just relying on internal IT staff to protect their systems.
If the credit union has a weakness in their internal systems it really is a weakness in the entire credit union system. Because, in terms of cyber security, nothing is isolated.
If you are a credit union and you are using a vendor for payments systems and you have weakness in your system, it will spread to the vendor and that vendor will spread the weakness to all the institutions that use its services.
We will be working with credit unions on improving cyber security-holding webinars, sharing guidance ...
CUJ: Turning to regulation, the biggest issue on the minds of many CU execs is the change to capital standards the agency has stated is coming.
Matz: We do intend to propose a regulation on risk-based capital. We cannot change the 7% floor because that is statutory. But we do believe strongly that the credit unions holding more risk on their books should hold higher amounts of capital.
We are mindful of the fact we don't want to adversely affect credit unions, impact their innovation and tie their hands unnecessarily. But we are concerned about those credit unions that just have so much risk on their books that they are a threat to the rest of the credit union system.
CUJ: It appears that banks may eventually have to hold 10% capital under their new rules. Will the new credit union capital model mirror the banks'?
Matz: There will be individual weighting, determined by the amount of risk on the credit union's books, that will determine how much capital a credit union needs to hold.
CUJ: Will the system's design take into account those credit unions that have done a good job managing risk and those that have little risk on their books?
Matz: We cannot drop below 7%, the statute does not permit that. But we anticipate that [the new risk-based capital system] will only impact a couple hundred credit unions. And I believe their colleagues would applaud the fact that these institutions will have to hold more capital. If credit unions like Cal State 9 and Telesis had more capital on their books, those losses would have been mitigated.
CUJ: In a previous Credit Union Journal report you said the proposed new capital rules would be put out for comment in the first quarter of the year. Is that timeline still holding?
Matz: We don't have a final proposed rule yet, but we are getting close, so sometime in the first quarter, I expect. Also, in the first quarter, I hope we will bring forward a rule on derivatives.
CUJ: Any help headed credit unions' way to ease their compliance burden?
Matz: We have been implementing my "Regulatory Modernization Initiative" for the past several years, and when we have areas in which we can reduce the burden we have. NCUA is always open to suggestions from credit unions. However, it bothers me when a group of credit union officials come in and talk about their regulatory burden, and I say, "OK, tell me which regulations to change," but then they offer little feedback.
They eventually point to the CFPB, but there is nothing we can do about the CFPB. We have to implement their regulations; that is the law.
We do have multiple instances of regulations we have changed or streamlined because of what we have heard from the industry, such as troubled debt restructuring.
CUJ: Was it difficult for the agency to introduce its new rule on home-based CUs, knowing this could eliminate a number of tiny credit unions?
Matz: No. It is time for these credit unions, if they are serious about remaining a credit union, to move to a commercial facility where they can act like a credit union.
Examiners should not have to work in conditions that are unsafe or unfit-some of the homes do not have proper ventilation, heating or air conditioning, and some have pets that have bitten or harassed examiners.
We also have an obligation to make sure all of the credit union's documents are kept in a safe environment-protected against fire, bad weather and leaks-and that members' privacy is safeguarded. I have reason to believe that most credit union documents kept in homes are not protected and that anyone in the home has access to them, certainly an intruder.
These credit unions are frequently sitting on sufficient capital so they can move into a commercial facility.
