Credit Union Times - May 22, 2013

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EDITORIAL
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Management Manages, Not the Examiner
GUEST OPINION
n today’s conservative regu-
latory environment, the
relatively high number of
issued documents of resolu-
tion revealed in a recent survey
of credit unions may not seem so
alarming. However, if
credit unions do not
adequately manage
their relationship with
regulators, this hands-
on approach could
hinder their ability to
provide the services
their membership has
come to expect.
Credit unions, or
any financial insti-
tution for that mat-
ter, manage risk to
produce yield. These
profits are reflected in
competitive services
for their membership.
The need to find the
balance between risk and reward
is one of the core fundamentals of
finance. If a credit union were to
cede its ability to manage to a po-
tentially risk-averse examiner, the
quality of their membership ser-
vices could be jeopardized.
As reported in the Feb. 25 issue
of Credit Union Times, a survey
conducted by the CUNA revealed
that 43%t of 1,500 respondents
had received one or more DORs
to correct unacceptable risk situa-
tions during their last
exams. CUNA Dep-
uty General Counsel
Mary Dunn said the
survey shows that
“there are too many
DORs out there.”
The high num-
ber of DORs is trou-
bling, but maybe
even more alarming
is how it points to
the growing influ-
ence of regulators in
the administration of
a credit union’s poli-
cies. The danger lies
not so much in any
particular examiners’
Some credit union managers

E. Prescott Ford is managing director, office of regulatory affairs at First Empire Securities.

CONTACT

800-645-5424 or
pford@1empire.com

have come to me for help because they felt that their examiner did not care if the credit union lost money over the next couple of years while waiting out today’s low-rate environment and were only concerned about not taking on any additional risk. I suspect that members of those credit unions would care if they were to lose money. And, to be fair, I think the examiners care as well–earnings are an integral component of the CAMEL rating system.

Keeping a balance
sheet very short may
be thought of as being
conservative if rates
are expected to rise.
However, this is not
risk management, it is
taking a risk position
that rates will rise.

Keeping a balance sheet very short may be thought of as being conservative if rates are expected to rise. However, this is not risk management, it is taking a risk position that rates will rise.

The problem here is that no one knows how long this rate environment may last. The 10-year Treasury in Japan has been below 2% for 15 years and counting. Losing money for 15 years would surely impact any credit union’s capital, which is another component of the CAMEL rating system, and threaten the safety and soundness of the credit union.

Examiners should be promoting strong risk management processes rather than dictating a specific risk position. Balance sheets should be managed in way that addresses the risk of rates rising, falling or staying the same. I am a firm believer that good risk management is good business, and by definition there needs to be risk for there to be a business to manage. In short, examiners should examine and managers should be left to manage.

My regulatory background is with the Office of the Comptroller of the Currency, and the distinction between examining an institution and managing an institution was clearly drawn for us. In a speech last year, then Acting Comptroller John Walsh stressed one of the key principles of supervision, examiner judgment does not replace that of management.

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If a credit union were
to cede its ability to
manage to a potentially
risk-averse examiner,
the quality of their
membership services
could be jeopardized.

Walsh explained that the examiner’s objective is to ensure that management is effectively carrying out its fiduciary responsibilities, operating in a safe and sound manner, complying with regulations, and appropriately managing risks. He said that within these parameters it is up to the institution, and not the examiner, to decide what products to offer, what prices to charge and what loans to make.