By David Reed
To your credit union, risk most likely means finding new ways to serve your members. As a member-focused organization, your credit union is used to recognizing and handling risk in a way that protects your organization while also providing your members with the products and services they need.
But from an examiner’s point of view, risk is the number one enemy, and something to avoid as much as possible. Examiners are primarily concerned with making sure your credit union is safe and sound. Safe and sound means your organization does not pose a risk of failure, which can in turn pose a risk to the NCUA’s Share Insurance Fund.
I train both state and federal examiners, and when I talk to them about their biggest concerns, many tell me they don’t feel comfortable volunteers know enough about the risk profiles and appetites of their credit unions. After the troubles the financial industry has seen in the past five years, examiners are scrutinizing every possible risk—and they expect the credit union’s board to be doing the same.
These concerns are reflected in the OIG Capping Report on Material Loss Reviews released by the NCUA Office of the Inspector General (OIG) in November 2010, which summarized the findings of Material Loss Reviews performed for failed credit unions from August to November 2008. The report determined one of the key contributors to credit union failures was the failure of the board to properly manage risks.
It’s no surprise the NCUA then added section 701.4 to the NCUA Rules and Regulations, outlining the responsibilities of boards of federally chartered credit unions to oversee the credit union’s direction and control. In order to effectively accomplish this, the rule added a requirement that directors have a certain level of financial literacy.
Section 701.4 doesn’t require volunteers to be as familiar with the concepts of financial risk as an accountant or loan officer, but rather that they have a level of financial literacy that allows them to read financial statements and other basic reports. These tools act as windows into the health of the credit union, and having this skill will help directors ask the right questions and properly manage risks. How are various programs performing? Is the credit union making money? Knowing the answers to these questions not only satisfies the examiners, but also helps the board guide the credit union in handling risk responsibly and successfully.
David Reed is a partner at Reed & Jolly, PLLC, Fairfax, Va.
Join Reed at CUES’ Director Risk and Compliance Seminar, September 9–10, 2013, Vancouver, British Columbia, Canada, to gain an in-depth understanding of credit union risk and regulations.
