The price of growth: what happens when a CU surpasses $10 billion?

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Reaching $10 billion in assets is a significant mark of a credit union’s growth and progress, but it also causes headaches. The Dodd-Frank Act requires depositories with $10 billion-plus in assets to follow the Dodd-Frank Annual Stress Testing and Comprehensive Capital Analysis and Review. In response, NCUA issued Part 702 Subpart E, requiring the largest CUs to submit capital plans and perform annual capital stress tests.

CUs nearing the $10 billion threshold should actively prepare their board and management teams several years in advance. Investing in a robust stress-testing infrastructure will help ensure the CU is can manage the additional risks and compliance issues.

In addition to stress-testing requirements, larger institutions face increased regulatory costs, greater scrutiny from examiners and auditors, reduced interchange fees, and other challenges, including model and scenario development. Mandatory capital stress tests also require additional investment technology, such as analytics and data-aggregation tools. That’s why it’s important for those approaching $10 billion in assets to prepare now.

Credit unions shouldn’t overlook the data-collection process and assumptions or underlying variables associated with stress testing. Projecting credit losses in a valuation model should include uncertainties such as local market rates, prepayment speeds, default rates, loss-severity rates, recovery lags, and discount rates. These variables are straightforward in the base scenario but can be complex in adverse scenarios. The Office of the Comptroller of the Currency (OCC) suggests an institution use its historical default and losses experienced during a prior recession as a baseline. Neither NCUA nor OCC specifies a particular approach, but both emphasize that the extent and complexity of credit-related stress testing should be appropriate for the institution’s unique business activities, portfolio size and concentrations.

Projected variables could be compared with historical data to develop a benchmark for expected consumer behavior. Understanding historical sensitivity allows CUs to make small model adjustments and fine-tune their assumptions.

Along with OCC scenarios, NCUA recommends creating an idiosyncratic scenario to capture the unique vulnerabilities and risks specific to each CU, which requires actively gathering data. Idiosyncratic scenarios could include events such as a natural disaster, operational risk, massive fraud, reputational risk, severe liquidity outflow, severe credit losses, housing price shock, processing errors or lawsuits.

Dodd-Frank’s goal in creating the Consumer Financial Protection Bureau (CFPB) was to create a fair, transparent and competitive financial marketplace.

Institutional Compliance Manage System (CMS) policies should include four independent control components: (1) board or management team oversight and ownership of the CMS policy; (2) written compliance program administered by the chief compliance officer, including components such as policies and procedures, training, monitoring and corrective action; (3) consumer complaint management program that effectively monitors, analyzes and organizes consumer complaints; and (4) annual third-party compliance audit.

A robust and effective CMS policy will prevent credit unions from engaging in business practices the CFPB considers unfair, deceptive, abusive, or discriminatory, as well as prevent or reduce regulatory violations. It’s important for credit unions to regularly assess their procedures to determine if the infrastructure is in place to manage new requirements. They also can prepare by reading the CFPB’s Supervision and Examination Manual, which details the examination procedures.

Once an institution crosses the $10 billion in assets mark, it will be subject to the Durbin Amendment, which may drastically reduce income earned from debti interchange fees. The rule caps these fees at roughly $0.24 per transaction, compared with $0.44 previously. To offset these losses, CUs could consider increasing minimum-balance requirements, imposing higher checking fees and offering fewer reward programs.

It’s difficult to quantify the exact dollar amount institutions forfeit annually in debit interchange fees because credit and debit interchange revenue is reported together on the call report. CUNA recently reported CUs with $10 billion-plus in assets lost interchange revenues of about 11 basis points as a percent of total assets.

Credit unions must stay informed on current regulatory actions because they allow the boards and management teams to better plan, adapt, and implement future business strategies.

Brandon Pelletier is director, strategic solutions group for ALM First Financial Advisors. He can be reached at

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Durbin Amendment Dodd-Frank CFPB OCC NCUA