Credit Unions Must Prep for New Cyber Risks

Board Action Bulletin

Stabilization Fund's Net Income in Second Quarter Tops $425 Million

ALEXANDRIA, Va. (Sept. 15, 2016) – The National Credit Union Administration Board held its eighth open meeting of 2016 at the agency's headquarters here today and received a briefing from the Office of Examination and Insurance on the rapidly changing nature of cybersecurity.

The Chief Financial Officer also briefed the Board on the performance of the Temporary Corporate Credit Union Stabilization Fund, which performed well in the first half of 2016.

New Technologies Mean New Risks and New Cybersecurity Demands

The financial services sector is experiencing an "Uber moment," experts with NCUA's Office of Examination and Insurance told the Board, and technological innovation, the expansion of social networking and growing interconnectivity are fueling fundamental change in cybersecurity procedures and processes.

That change carries with it more sophisticated risks and more numerous vulnerabilities for community-based financial institutions like credit unions. Potential effects on credit unions include higher mitigation costs and lower consumer confidence, as well as greater financial and legal risks.

"Cyber criminals and cyber terrorists are increasingly using innovative online services, new ways to transmit financial information and off-the-shelf toolkits to invade computer networks, snatch personal information and steal money," NCUA Board Chairman Rick Metsger said. "Credit unions, therefore, must evolve to stay a step ahead of the hackers and thieves knocking on their doors. To help credit unions, NCUA has made cybersecurity a supervisory priority since 2013, and we have conducted extensive training for our examiners along with considerable outreach to credit unions in this area. We will continue to provide these services in the future."

Investors poured more than $19 billion into financial technology companies in 2015, spurring payment, lending, banking and wealth management innovations that may replace current service models. That kind of disruption will, in turn, force rapid adjustments by financial institutions and regulators to their security strategies, including their ability to detect, prevent or recover from cyberattacks.

With cybersecurity now an integral part of the credit union business model, NCUA will continue to refine its approach to supervision in this area to strengthen the system's resilience to attacks. The agency maintains a cybersecurity resources webpage that offers extensive, detailed information on cybersecurity matters. Credit unions are encouraged to use this resource.

NCUA and its partners in the Federal Financial Institutions Examination Council, an interagency body that promotes uniformity in the supervision of financial institutions, have worked to help financial institutions develop better cybersecurity processes and policies. The council offers services at no charge that include outreach and industry education.

Last year, the council introduced its cybersecurity assessment tool to help credit unions and other institutions determine how prepared they are to address cybersecurity risks. NCUA is developing a new cybersecurity component to its examination process that embodies the comprehensive risk-management approach of the cybersecurity assessment tool.

Stabilization Fund Continues Positive Net Position

For the quarter ending June 30, 2016, the Temporary Corporate Credit Union Stabilization Fund's net position increased from $618.6 million to just over $1 billion.

NCUA's Chief Financial Officer briefed the Board on the performance of the Stabilization Fund, based on the best available preliminary and unaudited information.

"NCUA, from the outset, has been committed to reaching a resolution of the corporate crisis at the lowest cost to credit unions," Metsger said. "We're doing this by managing the Stabilization Fund with the utmost prudence. The continuing improvements in the Stabilization Fund's performance is evidence we're doing our job well and staying on the right course."

The change in the Stabilization Fund's net position resulted primarily from legal recoveries and improvements in projected cash flows relating to the legacy assets that secure the NCUA Guaranteed Notes Program.

A $419.3 million reduction to insurance loss expense and $8.2 million from guarantee fees contributed to the Stabilization Fund's $425.7 net income for the second quarter.

A $700 million payment from available cash to the U.S. Treasury in May decreased outstanding Treasury borrowings to $1 billion during the second quarter from $1.7 billion in the first quarter.

While the Stabilization Fund continues to have a positive net position for 2016, no funds are available to provide federally insured credit unions with an immediate rebate. NCUA must first repay the $1 billion in outstanding Treasury borrowings. Future changes in the economy or the performance of the legacy assets securing the NCUA Guaranteed Notes are likely to change the value of the assets the agency and the Stabilization Fund can eventually access at the end of the NCUA Guaranteed Notes Program.

Created by Congress in 2009, the Stabilization Fund has reduced the impact on credit unions of the costs of resolving the corporate credit union crisis. It is scheduled to expire in 2021. Based on current projections, NCUA expects no future Stabilization Fund assessments to credit unions.

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