Government Accountability Office Report on the NCUA – Why Credit Unions Fail
The United States Government Accountability Office (GAO) recently released its Report to Congressional Committees on the NCUA titled “Earlier Actions Are Needed to Better Address Troubled Credit Unions.” You can read the full report here.
The GAO’s criticisms focused on the NCUA’s Prompt Corrective Action (PCA) program and recommended “…additional triggers for PCA that would require early and forceful regulatory action…” The GAO’s recommendation was based on research showing that credit unions subject to PCA that did not fail were more likely subject to earlier PCA action. This means the NCUA is going to have to find a way to evaluate when these triggers are hit and supervise the PCA program for a larger pool of credit unions. If you were worried about how they were going to keep all of those new examiners included in the 2012 budget busy, you can rest easy.
There was a section of the report which lists specific conclusions reached as to why 85 credit unions failed from January 1, 2008 to June 30, 2011. The chart below illustrates these conclusions (reasons for failure are not mutually exclusive):
Operational risk is the most prevalent reason for credit union failures, which seems to be a pretty broad area. The example used by the GAO was poor internal controls over third party lending policies resulting in low quality loans. So looking at this closely, practically all 85 of these credit unions failed due to some deficiency in their credit risk management policies (concentration risk, MBLs).
There is no way to 100% accurately detect which loans will perform and which won’t. An old management professor once told me to always judge your actions by their inputs, not their outcomes. With that in mind, if you take your time in setting lending policies, monitor the performance of those policies and make necessary adjustments based on their performance, you should be able to stay out of the GAO’s 2014 issue of this report.
-Dan Price, CPA
Twenty Twenty Analytics Blogger
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