November 21, 2019

NAFCU recommends cost-benefit analysis, exam modernization to strengthen NCUA budget

NCUA budget briefing
NAFCU's Curt Long (right) provides comments to the NCUA Board on the agency's proposed 2020-2021 budgets.

Noting that the NCUA is "the leader among financial services regulators by publishing a detailed, draft budget and soliciting candid feedback from the industry to improve the efficient use of its sizeable budget," NAFCU's Curt Long Wednesday offered recommendations to help the agency "manage its funds in a prudent and transparent way."

Long, NAFCU's chief economist and vice president of research, provided comments during the agency's public briefing for its 2020-2021 budgets. To start the briefing, NCUA Board Chairman Rodney Hood stressed that the agency "must be good stewards of credit unions' money" – a sentiment that was shared by Board Members Todd Harper and J. Mark McWatters. However, Harper also expressed concerns about cutting too much of the budget, which could leave the NCUA poorly situated to handle a financial crisis.

Long, in his testimony, noted that the NCUA's operating fund budget, which is proposed at $316.2 million for 2020, has increased 57 percent over the past decade.

"The credit union industry remains focused on the efficient use of resources and encourages the NCUA to do so as well by achieving year-over-year budget reductions," Long said.

In order to achieve cost savings and accountability within the NCUA budget, Long recommended that the agency:

  • conduct robust cost-benefit analysis and look-backs for NCUA programs, not just rules, in order to promote safety and soundness while effectively developing programs and reducing regulatory burdens to allow credit unions to better serve their communities;
  • provide additional information on the NCUA's exam modernization programs – especially related to the Flexible Examination Pilot Program (FLEX), offsite and virtual exam procedures, and Office of National Examinations and Supervision (ONES) continuous supervision program – to address credit unions' struggles with procedural inconsistencies and achieve cost savings for credit unions and examiners. Long also discussed the agency’s Modern Examination and Risk Identification Tool (MERIT);
  • provide more information on the expiration of the NCUA Guaranteed Notes (NGN) program, including the pros and cons of the alternatives under consideration, and the impact on the Share Insurance Fund and potential future dividends or payments to credit unions; and
  • assess risk in the system and whether safety and soundness is appropriately balanced with prudent regulation, noting "examples of situations where examiners have used certain unofficial policy guidance as de facto regulation to hold credit unions responsible for certain behaviors and activities that are not clearly prohibited by law."

In addition, Long commended the agency's focus on strengthening credit unions' cybersecurity measures and while NAFCU generally supports the NCUA's principles and investments to do so, he "caution[ed] the agency against devoting too many resources without a formal assessment process for its work in this area."

"Aside from allocating $500,000 to acquire and implement data loss prevention tools and processes, the budget hardly itemizes any cybersecurity-related expenses for 2020 and 2021," Long noted. "NAFCU is concerned that some of the agency’s proposed investments into cybersecurity improvements, although well-intentioned, may be decoupled from results-based metrics, and may continue to drive costs disproportionately, resulting in yearly budget increases." He recommended that the agency leverage existing resources and expertise with other regulators.

Read Long's full testimony and detailed recommendations to strengthen the NCUA's budget. Following a presentation from NCUA's CFO Rendell Jones on the proposed budgets, the NCUA Board also heard from representatives from CUNA and the National Association of State Credit Union Supervisors.

Written comments on the proposed 2020-2021 budgets are due Dec. 2, which NAFCU will also provide on behalf of its members. The NCUA Board is set to vote on the budgets during its meeting Dec. 12.