NCUA Chairman Todd M. Harper speaks at credit union industry event in Washington, D.C.
As Prepared for Delivery on June 13, 2023
Good morning, everyone. And thank you, John, for that kind introduction. I always enjoy meeting with the leaders of Maryland and DC credit unions to hear what’s on their minds and identify emerging issues.
Without question, the issue of financial stability at certain depository institutions — namely Silicon Valley, Signature, and First Republic banks — has dominated recent news cycles. Those failures have demonstrated the importance of rapid and decisive regulatory action and 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 within the banking system is a reminder — for us all — of the need to manage capital, interest rate, liquidity, and credit risks. That’s why the NCUA highlighted each of those risks as areas of focus in the agency’s supervisory priorities in recent years. In concentrating on these issues when examining institutions, the NCUA must be forward looking, risk focused, and ready to act expeditiously, if needed. To that end, we also 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.
IRR, Liquidity Risk, and CLF
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 join the CLF and to serve as a CLF agent for a subset of the corporate’s 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.
Climate-Related Financial Risk
Another issue garnering increased attention by policymakers is climate-related financial risk. Both extensive scientific research and continual news headlines tell us shifts in temperatures and weather patterns continue to accelerate, and the costs of disasters like floods, hurricanes, and wildfires are rising, often hitting disadvantaged communities the hardest.
As a regulator and insurer of federal financial institutions, the NCUA has a duty to ensure the institutions it oversees remain resilient against all material risks. Those risks include financial risks due to weather-related events, including natural disasters. To better understand stakeholders’ views and experiences on climate-related financial risk that affect credit unions, the NCUA Board in April approved a request for information, or RFI for short.
As part of this RFI, commenters are encouraged to communicate any issues about the financial risks associated with climate events, including those impacting a credit union’s field of membership, lending, investments, liquidity, and capital. Ultimately, the goal of the NCUA’s RFI is to gain insight into the implications of weather-related financial risk for the overall resiliency of individual credit unions, the vibrancy of the credit union system, and the strength of the National Credit Union Share Insurance Fund. Other financial services regulators have issued similar RFIs to examine this growing challenge for the institutions they oversee.
Unfortunately, the increase in weather-related damage to our country’s infrastructure shows no signs of abating. So, the efforts by financial regulators like the NCUA and others to learn more about the corresponding risks and, equipped with that knowledge, act prudently to address them, need to continue. The comment period for the NCUA’s RFI runs through June 26.
Cybersecurity Risk
Many of you might have also heard me say before 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, the NCUA earlier this year began implementing its 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. In March, the White House issued its National Cybersecurity Strategy, 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. 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.
Thankfully, Congress heard our concerns and voted to more than double the available grant funding to approximately $3.5 million for this year. As a result, the NCUA can award more grants and bigger grants. In addition to grants for cybersecurity, training, MDI capacity building, underserved outreach, and consumer financial protection, we 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. 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 all these grants and initiatives is available online at NCUA.gov. For interested credit unions, the 2023 NCUA grant application period ends on June 30. Again, I encourage all eligible credit unions to apply so that we can maximize the impact of these funds.
Proposed Rule on Charitable Donation Accounts
While on the topic of the NCUA helping credit unions better serve their members, I would like to briefly mention the proposed rule on charitable donation accounts, which the NCUA Board approved late last month.
The proposed rule would add veterans’ organizations, as defined in the Internal Revenue Code, to the definition of a “qualified charity” that a federal credit union may contribute to using a charitable donation account. Many credit unions have fields of membership that specialize in serving military branches, military bases, and defense-related organizations. With this proposed rule change, we would allow those credit unions to better support their members and fulfill their missions.
That’s good for veterans, good for military families, good for credit union members, good for credit unions, and good for our country. The comment period on this proposed rule ends on July 31.
Closing
In closing, the credit union system is rapidly changing, and the NCUA must change with it. This isn’t your grandparent’s credit union system or even your parent’s credit union system. I can say that because credit unions run in the fabric of my family. My grandfather served on the board of a soap factory credit union in Indiana in the 1930s. My father started a teachers credit union in Illinois in the 1960s.
The world has changed considerably since then. Today, the credit union system is far more dynamic and larger with 426 credit unions with a $1 billion or more in assets, including 22 credit unions with more than $10 billion in assets. At the end of the first quarter of 2023, federally insured credit unions also had nearly 137 million members and more than $2.2 trillion in assets.
In responding to these changes, the NCUA’s focus going forward will remain on the strength of the system, the needs, and rights 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.
This regulatory 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 credit union 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. John, I look forward to our conversation.