Increased Regulatory Scrutiny: A Good Thing or Bad?
I was curious what this meant for our many credit union clients who are already struggling to keep up with the demands of regulatory compliance. So I called into the source, the NCUA. We do this every now and again as a way of keeping our many methodologies properly aligned against examiners' expectations, and I was overdue. But this time I threw out the question to the analyst I happened to be talking to, 'What does this newly created team mean for the average credit union?'
Basically what I was told was that only those credit unions whose portfolio's present increased risk based on today's current market conditions will be monitored by the NET. It's not intended to increase scrutiny on every CU or even those operating under Document's of Resolution. And because so few of our clients, banks and credit unions alike, have portfolio's heavily dependent on exotic or risky loans, this looks to be like a non-issue. That was good news, right?
Unless the FDIC and NCUA included money in their budgets to fund the creation of a time machine, this is more about damage control, not prevention.
It would have been if I had stopped asking questions; I didn't. I went to the NCUA website and researched the notes from recent Board meetings to identify when the creation of the NET was first discussed. Back in November, the NCUA Board first made public plans to fund creation of a specialized team. During that same meeting they also announced plans to add another 56 positions to their team of examiners, which would be necessary to shift the 2009 examination schedule to a twelve-month rotation. Whoa, wait a minute, a twelve-month examination rotation, a.k.a. more frequent visits? So, our CU clients aren't escaping increased scrutiny after all, are they? In reading through the Board report, it said that the staffing and related budget increase was at least in part due to "address the turbulent economic environment." So that was bad news, right?
Well yes and no. I have mixed feelings about all of this increased agency scrutiny that our clients are facing. Unless the FDIC and NCUA included money in their budgets to fund the creation of a time machine, this is more about damage control, not prevention. In our practice, we strive to help our clients identify and avoid risk before it hurts them, so I'm not a big fan of closing the barn doors after the cows have escaped. And to a certain extent this is exactly what both agencies are doing. So from that perspective, I consider all of this extra work to be less than ideal. But on the other hand, there's no denying we're facing a huge mess that can get a whole lot worse if things aren't managed as best as is possible. With all of the new programs available to assist lenders and borrowers alike, it's imperative that no further missteps are allowed, and solutions are applied where applicable. And based on how challenged our clients are already in trying to keep up with the speed of business while maintaining proper alignment with regulatory requirements, this extra scrutiny will increase the odds that what can be done will be done. So from that perspective I can see how increased examination activity is better than doing nothing.
But still, when I think about how difficult it already is for our clients to keep up with the ever-changing regulatory landscape and having to address increased scrutiny while being forced to either maintain or reduce staffing levels during these harsh economic times, I shudder. I've said it in previous posts that the demands of compliance never stop, are always changing, and new requirements are constantly being introduced that are almost instantly enforceable (and to prove my point, I just received the FDIC announcement of their new Remote Deposit Capture examination guidelines). We are going to have no shortage of things to write about as this year progresses, that's for certain.