Matz Addresses Cybersecurity, Interest Rate Risk and Supplemental Capital at AACUL Meeting
During a discussion with credit union officials yesterday as part a meeting of the American Association of Credit Union Leagues (AACUL), NCUA Chairman Debbie Matz addressed several timely topics of interest. In focusing on examination issues, Chairman Matz addressed the expectations on cybersecurity preparedness for credit unions. The NCUA, in adopting guidance released by the Federal Financial Institutions Examinations Council, has already initiated cybersecurity risk mitigation controls to determine the capacity of credit unions to detect and recover from cybersecurity attacks. From the period of June 16 to July 11, cybersecurity reviews were conducted by both credit union and bank examiners. More specifically, NCUA conducted 417 assessments of credit unions during this period. The goal was to determine the needs of credit unions relative to education, training, and best practices and to encourage use of NCUA's cybersecurity resource page found at http://www.ncua.gov/Resources/Pages/cyber-security-resources.aspx. Chairman Matz emphasized that no security system is stronger than its weakest link. NCUA has concerns over all links in the chain especially those of smaller credit unions as such institutions have limitations in information technology staff, and internal controls. Regulatory experience has revealed that third parties use smaller institutions, often interconnected with correspondents, to gain access to all digital relationships. Most common are account takeovers and crypolocker/hostage risks.
Chairman Matz also expressed concern that some credit unions have concluded that interest rate risk is no longer an issue at this time. She cautioned credit unions from drawing this conclusion and shared that NCUA continues to monitor results from its call report review and has found that excessive interest rate risk exists requiring mitigation. She noted that federal regulators are predicting a further rise in interest rates for 2015.
With respect to risk based capital, Chairman Matz expressed appreciation for the volume and detail in comment letters submitted during the public comment period. She emphasized that NCUA is carefully reviewing all comments and shared the following insights to date:
- All risk weights will be reviewed, and some should be lowered and the five candidates are: CUSOs, corporates, investments, mortgages, and member business loans.
- Credit unions will not be required to raise $7 billion in capital.
- Examiners will not be authorized to raise any individual credit union's capital requirement. Only the NCUA Board can increase minimum capital requirements.
- The implementation period will be extended beyond 18 months. The NCUA recognizes the need for a period of time to revise call reports and to adjust balance sheets.
Chairman Matz plans to work in partnership with and receive additional input from its newly formed industry working group on the proposed risk-based capital rule and to discuss alternative ideas.
In providing insight into the NCUA Board meeting scheduled for today, Chairman Matz indicated that changes to the current fixed asset rule to permit federal credit unions to manage their fixed assets without requirements of advance permission or waivers will be proposed as part of the NCUA's commitment to reducing the regulatory burden. This change would allow federal credit unions to update facilities, upgrade technologies and make purchases that do not impact safety and soundness.
League President Paul Gentile asked Chairman Matz how the NCUA can foster the dialogue to help credit unions obtain supplemental capital authority. In response, she stated that NCUA supports the use of supplemental capital for credit unions. It is her belief that the final risk-based capital rule is the greatest incentive for Congress to act on supplemental capital legislation.
NCUA Board Member Rick Metsger also addressed the audience. He focused on the risk-based capital rules and emphasized that he is sensitive to the nexus between capital requirements, capital planning, and credit union business decisions. He reinforced the comments of Chairman Matz about expected changes to the risk-based capital proposed rule and expanded the possibilities for change by offering the following additional insights to the changes to the proposed rule outlined by the Chairman:
- risk weight changes on investments, Treasuries, cash deposits, corporate perpetual capital, and Federal Reserve funds are expected to be reduced;
- address issues surrounding requirements for capital requirements for mortgages sold on the secondary market as compared to those held in portfolio;
- outlier credit unions will be a focus to regulate capital rather than higher capital standards imposed across the board;
- goodwill needs to be recognized and grandfathered to include past transactions;
- efforts will be made to determine how to deal with interest rate risk;
- the definition of concentration risk, whether by product line, borrower limits or other standard will be considered as it is not yet captured in the proposed rule; and
- the strength of well capitalized credit unions deserves a safe harbor within the final risk-based capital rule thereby shifting the burden of proof to examiners to demonstrate that a credit union is not well capitalized. He emphasized that he does not want to eliminate the dialogue between credit unions and examiners, that he wants to keep flexibility in the rule and that credit unions need to be able to rely on capital levels.
In response to League President Paul Gentile's inquiry, Mr. Metsger responded with his strong support for supplemental capital and that it is an appropriate time for Congress to remind Congress that they can address this issue. He plans to seek every opportunity to advance the issue and to assist the NCUA in doing so as well.
With respect to federal credit union ownership of fixed assets, Mr. Metsger led the consideration of this issue before the NCUA Board which has advanced to the anticipated proposed rule changes. He is strongly in favor of giving credit unions the ability to make their own decisions on managing fixed assets.
The League will continue to monitor and impact the progress of these issues to benefit members.