A Deeper Dive on the NCUA's Supervisory Priorities for 2023

Every January, the NCUA releases their Supervisory Priorities for the year ahead. These can be a signal to credit unions of what areas might draw more focus and scrutiny from their NCUA examiners during their next exam. While the list is not exhaustive, it can be instructive to review what priorities are new to the list this year, as well as which priorities from 2022 have now fallen off the list.

What’s new in 2023?

Liquidity Risk

Liquidity Risk is a new addition to the Supervisory Priorities list in 2023, and this comes as no surprise. During the pandemic, many credit unions saw share balances skyrocket as stimulus checks came in and member spending slowed. 2022 saw those trends reverse and liquidity pressure rise. NCUA will be taking a close look at policies, procedures, and risk limits to evaluate a credit unions’ liquidity risk management framework. They also indicate they will evaluate:

• The potential effects of changing interest rates on the market value of assets and borrowing capacity.
• Scenario analysis for liquidity risk modeling, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts).
• Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds).
• The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

Fraud Prevention and Detection – New Questionnaire

Fraud was a priority in 2022, and remains on the 2023 list. What is new, however, is NCUA’s new management questionnaire designed to enhance the identification of fraud red flags, material supervisory concerns, or other potential new risks. Credit unions can expect to receive the questionnaire during the pre-examination stage when credit unions compile all the policies, procedures, reports, and other documents requested by the examiners. The questionnaire will be delivered through the MERIT survey function.

Succession Planning

While not listed as an official Supervisory Priority, the 2023 Letter to Credit Unions contains “Other Updates.” In this section, they discuss the importance of Succession Planning and note that examiners will “ask for information about a credit union’s approach to succession planning for senior leaders, including any written succession plan the credit union has established.”

Which 2022 priorities were removed?

While some priorities in 2022 carried over to the 2023 list, such as Interest Rate Risk, Credit Risk, Cybersecurity, and Consumer Financial Protection, several 2022 priorities were removed from the 2023 list. This does not mean NCUA will not examine and address these areas in 2023 exams, but it does give some indication of where their focus may be shifting.

Payment Systems

This was somewhat of a surprise to see payment systems removed from the priority list. There was no 2022 regulation change or implementation date discussed in the 2022 priority, and payment fraud losses are on the rise. Perhaps now that P2P services like Zelle are more established NCUA is focusing on other areas where the environment has changed more dramatically.

BSA/AML

BSA/AML has been a mainstay on the NCUA’s Supervisory Priorities list since 2015, so it’s somewhat surprising to see it actually taken off the list, especially considering credit unions are dealing with newly implemented elements of the Anti-Money Laundering act of 2020 and the NCUA’s addition of new BSA specialist positions for their 2023/2024 budgets. Despite its removal, there is no doubt BSA/AML will continue to be a critical examination topic for all credit unions.

Capital Adequacy and Rule Based Capital Implementation

Capital Adequacy was new to the list in 2022 in response to both the downward pressure on net worth ratios from share growth, as well as the new final risk-based capital rule, which was effective January 1, 2022. While this is no doubt still an important element for examiners, rising interest rates and declining liquidity have put other focus areas ahead of this for now.

Loan Loss Reserving

The 2022 Loan Loss Reserving Priority was focused on credit unions transitioning from ALLL to CECL. After years of delays, the CECL implementation date of January 1, 2023 finally arrived. With credit unions now reserving based on CECL, this priority has been removed. The NCUA has released and continues to update a CECL tool designed for small credit unions.

Loan Participations

Loan participations falling off this list of priorities is not surprising. A new item in 2022, NCUA’s focus was on making sure credit unions were evaluating and understanding the risk of loan participations and ensuring those transactions fit within their risk tolerance, as well as ensuring proper vendor due diligence and record-keeping. As credit unions became more familiar and comfortable with these transactions, this was bound to fall off the priority list.

LIBOR Transition

2022’s focus on identifying credit unions with significant LIBOR exposure and transitioning away from LIBOR was successful, and this priority has unsurprisingly been sunset for 2023.

Where Can I Find Out More?

• NCUA’s 2023 Supervisory Priorities can be found in Letter to Credit Unions 23-CU-01: https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities
• NCUA also recently held a webinar on their 2023 Supervisory Priorities, which can be viewed on their YouTube page here: https://www.youtube.com/watch?v=SnUR_ex15aA
• Related: Read more about the Supervisory Priorities from NAFCU
• Related: CUNA Summary: Interest rate, liquidity, credit risks top NCUA 2023 supervisory priorities