Despite persistent pressure from across the credit union community, NCUA continues to insist that examination cycles for federally insured credit unions will not be returning to an 18-month schedule.
But the chorus of voices upset with NCUA's refusal to consider changing the schedule continues to grow.
Last month, NAFCU sent a letter to NCUA floating the idea of returning to an 18-month examination cycle for some CUs. Some state leagues, including the Cooperative Credit Union Association — the joint league representing Massachusetts, New Hampshire and Rhode Island — came out in support of the measure, with CCUA writing its own letter to NCUA pressing the regulator to look at these issues.
Just two days later, however, NCUA said it wouldn't be changing exam timelines, citing safety and soundness concerns. But that argument has drawn criticism from many corners, including from NCUA Board Member Mark McWatters, the lone Republican on the board.
Credit Union Journal has obtained a copy of NCUA's formal response to the CCUA's letter. Writing on behalf of the agency, NCUA Director of Examination and Insurance Larry Fazio outlined what the regulator sees as the risks involved with lengthening the examination schedule. In short, Fazio told CCUA that the agency currently does not have the enhanced data and modeling capabilities necessary to support 18-month exams, that the AIRES exam platform is near the end of its life cycle and would need to be redesigned before any rescheduling could take place, as well as concerns about the share insurance fund and workforce management.
"I recognize the potential advantages to adopting an extended exam cycle for healthy credit unions, such as devoting more resources to an improved examination experience and focusing on weaker institutions," wrote Fazio. "However there are various open questions on the efficacy of an extended exam cycle and the need for more dialogue on this subject."
Fazio also pointed out that should another financial crisis occur and the agency has ramped down to an 18-month cycle, it will take time to ramp back up.
CCUA shot back with a statement of its own, with President and CEO Paul Gentile saying that the agency "needs to evolve for the good of the system and find ways to leverage data for better ongoing analysis, not just during the on-site exam cycle."
"Just-released second quarter data show that only 1% of insured shares are in CAMEL 4 and 5 credit unions," he continued. "The number of troubled credit unions is at an historic low, yet the agency maintains a 12-month cycle for all credit unions. More flexibility is needed in the exam cycle duration to ensure the agency can better use resources in those credit unions that need it, and well-run credit unions experience less disruption from lengthy annual exams."
NASCUS President and CEO Lucy Ito pointed out that exam scheduling discussions are also taking place out of the public eye. "Fine tuning the risk-based examination program, and flexibility in the length of the exam cycle, are issues that NASCUS, state regulators, and NCUA discuss on an ongoing basis," said Ito in an email to Credit Union Journal. "We are constantly looking to identify efficiencies in examination that balance reduced burden for credit unions with legitimate supervisory needs. Those discussions continue, regulator to regulator."
Regardless of the agency's reasoning, many observers have taken issue not with NCUA's decision to stick with yearly exams, but with the speed with which it shot down the idea.
Geoff Bacino, a former NCUA board member and now a partner at Bacino & Associates, noted that a trend at NCUA lately has been "to dig in their heels; they make their opinion known and then there's no shifting it," he said. "You can't get them to say 'Okay, we'll think about it.'"
"My sense is that it shouldn't be this difficult, but it's the nature of bureaucracies that it is," observed Chris Howard, VP of research at Callahan & Associates. "Bureaucracies — and I don't think this is special to NCUA — don't traditionally give up power that they acquire. … I don't think anybody should be surprised that NCUA is finding lots of creative ways to defend something that arguably made sense when it occurred but inarguably didn't prove to have been necessary."
Howard said one problem with NCUA's reasoning is that all CUs are being handled in the same manner, even though there are thousands of CUs all with different circumstances and facing different levels of risk.
While it's possible to look back at the financial crisis and understand why NCUA moved to an annual examination cycle, he said, "you can also look back and see that the extraordinarily overwhelming majority of credit unions came through the crisis just fine — and they didn't come through the crisis just fine because of NCUA. They came through just fine because they're well-managed, they're managed safely and soundly, and managed professionally for the benefit of their member owners."
For his part, Bacino emphasized the cyclical nature of the financial crisis — including that it could happen again. "I'm not one of those folks who says you let the doors loose and everybody gets to do what they want," he said. "But I am one of those folks, having served twice [on the NCUA board] that understands that you go through basic cycles. This idea that it would take less to push us over the tipping point is something I don't necessarily believe in."
At least one credit union executive, however, thinks NCUA may be on the right track, no matter how unpopular its current position is. "We live in a world that is so topsy-turvy, something can go wrong pretty quickly," said Bill Kennedy, CFO at Department of Interior FCU. "If there's a renegade credit union out there, they could make things go south pretty quick. We all swim in the same river, so to speak, and if your credit union goes south, we all have to pay for it. Although it's a royal pain to have an annual examination, I think from an overall risk standpoint, considering all the risks credit unions are having to take today to maintain margins …someone needs to be on top of them."
Part of the argument in favor of an 18-month cycle is that the financial picture is vastly improved from what it was when NCUA instituted yearly exams. But Kennedy quashed that idea, noting that CUs are taking many more risks than they were in the past. "It doesn't take a whole lot of large credit unions to go south for the industry to have to ante up, and there are fewer and fewer credit unions every year," he said, noting that a shrinking industry means a bigger impact when a CU fails.
"There's a possibility we could get to a point where some credit unions need examinations every nine months," he said. "It depends on what areas they start getting involved in. I think if a credit union is doing a lot of business participations and SBA lending and putting a lot of 30-year mortgages on the books, somebody's got to be watching them. I don't know the answer, but I think it's more likely to me that a shorter timeframe is better than a longer timeframe."
