As Prepared for Delivery on May 6, 2023
Good morning, everyone. And, thank you, Ron, for that kind introduction.
It is wonderful to join you and experience the charm and the seemingly never-ending winter of New England again.
Credit Union System Safety and Soundness
Without question, the issue of financial stability at depository institutions has dominated recent news cycles. We don’t have to look further than the recent failures of Silicon Valley, Signature, and First Republic banks that have made headlines to see the importance of rapid and decisive regulatory action to stem the tide of fear when consumers’ hard-earned savings hang in the balance.
Naturally, this has led to questions about the impact these events will have on the NCUA, credit unions, and their members, as well as the overall financial system. The recent turmoil in the banking system is a reminder of the need to manage capital, interest rate risk, liquidity risk, and credit risk. That is why they were all highlighted as areas of focus in the NCUA’s supervisory priorities for the last several years. In concentrating on these issues when examining institutions, the NCUA must be forward looking, risk focused and ready to act.
To that end, we recently updated our guidance on how examiners work with credit unions exposed to the market risk of rising interest rates. By increasing clarity and flexibility, these changes to the supervisory framework for interest rate risk are a win for both examiners and credit unions.
However, managers and boards of directors must remain diligent in managing the potential risks on their balance sheets and continue to monitor economic conditions and the interest rate environment. The good news is that the credit union system overall remains well positioned at this time to handle any economic disruptions and market uncertainty. What’s more, the NCUA is well positioned through the supervisory process to address any issues that may arise from broader market concerns about liquidity in the financial services sector.
We will continue to monitor credit union performance through the examination process, offsite monitoring, and tailored supervision. In addition, the agency is coordinating with other federal financial institution regulators to ensure the overall resiliency and stability of our nation’s financial services system.
Interest Rate Risk, Liquidity Risk, and the Central Liquidity Facility
Changes in inflation, the interest rate environment, and broader economic conditions over the last year call for extra vigilance. A credit union’s ability to manage interest rate risk will remain a crucial factor in its performance going forward.
The current economic environment also underscores the value of the NCUA’s Central Liquidity Facility. The CLF functions as an emergency liquidity backstop for the industry, similar to the Federal Reserve’s discount window. And, while the CLF is an effective mechanism for managing liquidity risk, legislative enhancements would provide the NCUA with greater flexibility to respond to future liquidity events.
At the start of the COVID-19 pandemic, Congress allowed corporate credit unions to become a CLF agent for a subset of their members. However, when that temporary authority expired at the end of last year, more than 3,300 credit unions lost access to the CLF. Without this provision, most small credit unions with less than $250 million in assets no longer have access to a federally backed liquidity resource. And, the CLF’s liquidity capacity contracted by nearly $10 billion. Now is not the time to cut a liquidity lifeline.
That’s why the NCUA Board is united in its legislative request to restore the CLF’s agent-member flexibility, and the agency will continue to engage with Congress on this legislative priority. Well-run and well-capitalized credit unions also have access to the Federal Reserve’s Discount Window and the newly created Bank Term Funding Program. As always, the NCUA is committed to protecting credit union members and the safety and soundness of the credit union system. No one has ever lost a single penny of insured share deposits within the credit union system. And, maintaining your members’ confidence applies to both protecting their savings and ensuring their safe, fair, and affordable access to financial products and services.
Consumer Financial Protection
I recently heard a podcast with former NCUA leaders and examiners talking about the agency’s supervisory priorities for 2023. They went through the priorities listed in the January letter to credit unions one-by-one, with each item generating some strong opinions and lively discussion. However, when they arrived at the topic of consumer financial protection, the conversation ground to a halt. Just crickets.
To recover from this awkward silence, the podcast host recounted a story from when he was a problem case officer at the NCUA. He described a meeting in which his director of special actions at the time addressed the team about consumer financial protection, saying, “I don’t give a [crap] about that; are they making money?” That attitude has unfortunately permeated the NCUA’s work for more than three decades, but it is wrong.
Let me be perfectly clear on this point: safety and soundness and consumer compliance do not compete with one another. It is not a zero-sum game where gains by one means instant and commensurate losses for the other. Across the banking and credit union systems, the two — safety and soundness and consumer financial protection — actually go together, just like Frank Sinatra’s song about love and marriage. In fact, you can’t have one without the other. And, consumer compliance is not just a good principle, it is good business.
De-emphasizing consumer financial protection in credit unions and at the NCUA carries real consequences, such as serious harm to consumers, who could end up paying more for financial products and services, being denied a mortgage to buy a home, and being blocked from wealth building; as well as potential litigation costs and reputation risk for the credit unions. We need to think of these concepts as two sides of the same coin.
The NCUA’s vision statement — approved by the NCUA Board last year — is a clear confirmation of that relationship to, quote, “Strengthen communities and protect consumers by ensuring equitable financial inclusion through a robust, safe, sound, and evolving credit union system.” The connection couldn’t be more clear.
Many of you might have also heard me say that the single biggest credit union issue that keeps me up at night is cybersecurity. Ransomware, social engineering, and phishing are but a few of the known examples of the cyber threats we all face. But what worries me more are the countless threats we do not know about. And, these risks are likely to continue and accelerate in the foreseeable future. Therefore, all of us must improve our cybersecurity practices.
To that end, we are implementing the new Information Security Examination procedures for credit unions to prepare for, withstand, and recover from cybersecurity attacks. And, while the NCUA is an independent agency, there are some things that take a whole-of-government approach — including protecting our nation’s critical infrastructure — of which credit unions are a vital part. The White House issued its National Cybersecurity Strategy in March, which prioritizes the protection of critical infrastructure, including the financial services sector, through targeted grants, legislative action, and private sector engagement.
For the NCUA’s part, the Community Development Revolving Loan Fund includes grants to support Digital Services and Cybersecurity. The application period for the 2023 grants opened earlier this week, and I strongly encourage all eligible credit unions to apply. For this iteration, we urged Congress to increase funding for these grants, because demand has consistently surpassed available funds. In 2022, the NCUA received 220 grant applications for $4.7 million, and ultimately, awarded only 90 grants for $1.5 million.
Thankfully, Congress more than doubled the grant funding to approximately $3.5 million for this year. As a result, the NCUA can award more grants and bigger grants. We also have two more new grant initiatives for 2023. The first is the Impact through Innovation pilot with a maximum award of $100,000, which is squarely targeted to under-resourced communities by focusing on banking deserts, affordable housing, credit invisibles, and fintechs.
And, the second new initiative is the Small Credit Union Partnership pilot with a maximum award of $50,000, that will assist small credit unions in pooling resources to realize economies of scale and achieve their growth objectives. Both grant initiatives will help institutions that support under-resourced communities innovate and negotiate the challenges of an uncertain economic future. Additional information on these three grants and several other initiatives is available online at NCUA.gov.
The Cooperative Credit Union Association’s small credit union assistance program follows a similar model in providing financial assistance for institutions to improve technology, security, and operations.
For interested credit unions, the 2023 NCUA grant application period ends on June 30. I encourage all eligible credit unions to apply so that we can maximize the impact of these funds.
Cyber Incident Notification Rule and Legislative Priorities
And, in September the cyber incident notification rule goes into effect. By setting parameters for a reportable incident and the minimum notification requirements, these notifications allow us to work more efficiently with other agencies and the private sector to respond to cyberattacks before they become systemic.
Additionally, the NCUA continues to ask for legislative and policy changes to reinforce consumer confidence in the system and give the agency the proper tools to respond to any challenge. We are working to restore third-party vendor authority to close the growing regulatory loophole that prevents us from seeing the full picture of the risks CUSOs and third-party service providers may pose within the credit union system.
And, as I mentioned earlier, we also are engaging with Congress to make permanent the legislative enhancements made to the Central Liquidity Facility by the CARES Act, so we can better respond to future liquidity events.
In closing, the credit union system is rapidly changing, and the NCUA must change with it. This is not your father’s or even your grandfather’s credit union system. I can say that because both my father and grandfather were involved in chartering credit unions. Back then, credit unions were extremely small, focused intently on serving members’ needs, and posed limited risks to the broader financial system.
Today, the credit union system is far more dynamic and larger with more than 400 credit unions with a $1 billion or more in in assets. At the end of 2022, federally insured credit unions had 135.3 million members and more than $2.1 trillion in assets. With the recent growth in the number of billion-dollar-plus credit unions, cybersecurity threats, and economic uncertainty, we see much greater risks for which the NCUA must prepare. And, the potential impact risks within the credit union system can have on the broader financial services sector and the economy have grown as well.
Going forward, our focus will remain on the strength of the system, the needs of credit union members, and the NCUA’s preparedness to respond to evolving economic conditions. As such, the NCUA will continue to be fair and forward looking; innovative, inclusive, and independent; risk focused and ready to act when needed; and engaged appropriately with stakeholders to develop effective regulation and efficient supervision. And, this philosophy will continue to drive the NCUA’s actions in the years ahead.
In doing so, we will prioritize capital and liquidity, cybersecurity, consumer financial protection, and inclusion. And, by inclusion, I mean both diversity, equity, and inclusion within our agency and within the broader financial service system. And, to keep pace with the changing competitive and technological landscape, the NCUA will continue to foster innovation within the agency and credit unions, while balancing consumer financial protection and financial stability. If we all do our jobs right, we will be successful in fulfilling the credit union system’s statutory mission of promoting access to affordable credit, especially for people of modest means, for generations to come.
Thank you again for inviting me to be with you today. Ron, I look forward to our conversation.