Corporate Credit Unions:

Competitive Environment May Stress Financial Condition, Posing Challenges for NCUA Oversight

GAO-04-977: Published: Sep 10, 2004. Publicly Released: Oct 12, 2004.

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Thousands of credit unions have placed about $55 billion of their excess funds in corporate credit unions (corporates). In a three-tiered system, corporates provide lending, investment, and processing services for their member credit unions. Problems with investments in the past prompted regulatory changes that required higher capitalization and stricter risk management, but allowed for expanded investment authorities. GAO assessed (1) the changes in financial condition of the corporate network and (2) the oversight of corporates by the National Credit Union Administration (NCUA), the federal regulator of credit unions.

Corporates face an increasingly challenging business environment that potentially could stress their overall financial condition. In response to the competitive environment, corporates are offering new and more sophisticated products and services, expanding their use of technology, and seeking opportunities to merge or collaborate with other corporates. The corporates' financial condition as measured by profitability and capital ratios remained close to a range that has prevailed since the mid-1990s. However, since 2000, a large influx of deposits, coupled with low returns on traditional corporate investments, has constrained earnings and caused a downward trend in corporates' overall profitability. To generate earnings, corporates increasingly have targeted more sophisticated and potentially riskier investments, but appear to be managing risk by shifting toward more variable-rate and shorter-term investments, providing a potentially better match for the relatively short-term nature of their members' deposits. However, the corporates' changing business environment and utilization of more sophisticated and riskier investments increases the importance of NCUA regularly assessing its oversight processes to ensure that corporates are properly managing these risks. NCUA has strengthened its oversight of corporates by creating a centralized office for oversight, revising regulations, implementing risk-focused supervision, and hiring specialists. However, NCUA faces challenges in identifying networkwide problems on a consistent basis, using specialists effectively, providing relevant guidance on mergers, and assuring the quality of corporates' internal controls. Although NCUA identified deficiencies during its examinations, it has not systematically tracked their resolution or evaluated trends in examination data, which could help anticipate emerging issues facing corporates. NCUA also did not fully consider all risks when allocating resources or assigning specialists to examinations, leading to NCUA overlooking some information system deficiencies. Although corporates continue to consider mergers to remain competitive, NCUA had not developed adequate guidance for submitting and reviewing merger proposals. Finally, NCUA has not ensured that corporates' internal controls have remained consistent with those of similarly sized financial institutions

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To promote a more systematic and consistent approach in NCUA's oversight of corporates to ensure they are safely providing financial services to natural person credit unions, the Chairman of the National Credit Union Administration should provide specific guidance to corporates for merger proposal packages to ensure they are providing sufficient and relevant information, and improve guidance to examiners to ensure that merger proposals are reviewed consistently and meet the goals of serving members while not placing the National Credit Union Share Insurance Fund at undue risk.

    Agency Affected: National Credit Union Administration

    Status: Closed - Implemented

    Comments: The NCUA released a revised Merger and Conversion Manual on July 13, 2005. As part of the revision, OCCU prepared a section for the Manual with information specific to corporate credit unions. The information in the Manual consolidates all merger-related information in one document and provides specific guidance to corporate credit unions to ensure they provide sufficient and relevant information during the merger process. In November 2007, OCCU issued updated guidance to corporate examination field staff referencing the Manual to ensure consistency as well as provide direction regarding the review of merger proposals and supervision of the merger integration process

    Recommendation: To promote a more systematic and consistent approach in NCUA's oversight of corporates to ensure they are safely providing financial services to natural person credit unions, the Chairman of the National Credit Union Administration should pay increased attention to oversight of corporates' risk management functions to ensure corporates have sufficient capacity and skills to monitor and manage their risks.

    Agency Affected: National Credit Union Administration

    Status: Closed - Implemented

    Comments: During the annual budget process, the Office of Corporate Credit Unions (OCCU) conducts an analysis of its staffing needs to determine the type and number of staff positions necessary to provide effective oversight of corporate risk management functions. OCCU presents its findings to the Executive Director's office for consideration during the mid and year-end budget cycles. During the past several years, OCCU has determined the need for more specialists and less generalist corporate staff. OCCU staffing has been adjusted accordingly and specialist hiring levels have increased. Specialist staffing levels will continue to be reviewed and adjusted in the future to ensure the requisite knowledge and expertise are available to monitor the changing operations of corporate credit unions.

    Recommendation: To promote a more systematic and consistent approach in NCUA's oversight of corporates to ensure they are safely providing financial services to natural person credit unions, the Chairman of the National Credit Union Administration should track and analyze examination deficiencies on a networkwide basis to identify and track recurring and pervasive issues throughout the network and to ensure that corporates take required corrective actions.

    Agency Affected: National Credit Union Administration

    Status: Closed - Implemented

    Comments: The Office of Corporate Credit Unions developed a Global Tracking System (GTS) which tracks all problem areas in each corporate credit union from initial discovery through resolution. Information on the problem areas for each corporate is updated on a monthly basis. Management is able to generate reports identifying all corporate credit unions experiencing a specific problem (for example, inadequate Bank Secrecy Act monitoring). The information includes the dates problem areas were discovered, due dates for completion of corrective action, any revisions to the due dates, final completion dates, and comments provided by the examiner through out the process. At any point in time management can be provided a repot which will reflect the number of corporates exhibiting a specific problem area. On a corporate system wide basis management can identify and track problem area. On a corporate system wide basis management can identify and track problem areas, how pervasive they are, and how successfully corrective action is being implemented.

    Recommendation: To promote a more systematic and consistent approach in NCUA's oversight of corporates to ensure they are safely providing financial services to natural person credit unions, the Chairman of the National Credit Union Administration should establish a process and structure to ensure more systematic involvement of specialists in identifying and addressing problems and developing and consistently applying policies, and reassess whether there are sufficient specialists to oversee corporates.

    Agency Affected: National Credit Union Administration

    Status: Closed - Implemented

    Comments: The Office of Corporate Credit Unions (OCCU)issued an instruction to staff for the development of a one-year plan(OYP)dedicated to the examination and supervision of each corporate credit union during the next 12 month horizon. This supervision tool replaces the three-year plans (TYP). It was determined that a three year window was too broad for effectively planning OCCU supervision efforts. Part of the OYP process requires the examiner to complete questionnaires developed by the specialists in their specific areas (for example, the payment systems specialist developed the payment systems questionnaire). The examiner completes the questionnaires at the conclusion of the examination and as part of the OYP creation process. The questionnaires are reviewed by the respective specialist (information systems, payment systems, or capital markets) and in consultation with the corporate field supervisor a determination is made as to which examinations and/or supervision contacts the specialists should be assigned. On an annual basis the office evaluates its resources to ensure there are an adequate number of specialists and examiners to provide effective oversight.

    Recommendation: To promote a more systematic and consistent approach in NCUA's oversight of corporates to ensure they are safely providing financial services to natural person credit unions, the Chairman of the National Credit Union Administration should require corporates with assets of $500 million or more to be subject to the internal control reporting requirements of the Federal Deposit Insurance Corporate Improvement Act of 1991 to ensure that corporates are held to the same standards as other financial institutions that face similar risks.

    Agency Affected: National Credit Union Administration

    Status: Closed - Not Implemented

    Comments: NCUA is currently working with FFIEC counterparts in developing uniform standards applicable to such audits. NCUA participates on the FFIEC Chief Accountants Working Group that is currently reviewing the set of auditing standards that should govern such engagements (i.e., PCAOB attestation standards or AICPA standards). The AICPA is in the process of rewriting their attestation standards and the agencies are closely monitoring that process. NCUA staff will propose a revision to section 715 of the Rules and Regulations, Supervisory Committee Audits, later in 2005. As part of that effort, staff will recommend that the Board request public comment on a requirement that credit unions of $500 million or more in assets (including corporate credit unions) obtain both a financial statement audit and an attestation of internal controls over financial reporting. On May 3, 2007, NCUA responded to GAO that the NCUA Board had issued an advanced notice of proposed rulemaking in February 2006, to solicit input on this issue. Based on the feedback received and various developments for internal control attestation requirements, NCUA has not taken any additional regulatory action.

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