NCUA Assesses Credit Union Exposure to Climate-Related Physical Risks
The National Credit Union Administration (NCUA) released a Research Note that examines the exposure of credit unions to climate-related physical risks. In a related development, the NCUA Board approved by vote a request for information seeking comments on current and future climate and natural disaster risks to federally insured credit unions, related entities, their members, and the National Credit Union Share Insurance Fund. NCUA is also seeking stakeholder comments on opportunities to enhance its supervision and regulation of each regulated entity’s management of such risks. Comments will be accepted for 60 days after publication in the Federal Register. Additionally, NCUA collaborated with the U.S. Department of the Treasury’s Office of Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FED), and the Federal Deposit Insurance Corporation (FDIC) to revise the interagency policy statement on allowance for credit losses.
The research findings on credit unions' exposure to climate-related physical risks suggest that roughly one-quarter of federally insured credit unions, accounting for one-third of system-wide assets, are located in communities classified as having relatively high or very high risk of experiencing negative effects due to natural hazards. Minority depository institutions (MDIs) face a substantially higher risk than the credit union system in the aggregate. Just over half of MDIs are at relatively high or very high risk of experiencing negative effects from natural hazards. The research indicates that credit unions most at risk of negative outcomes due to natural hazards tend to be located in coastal areas—particularly in California, Texas, and Florida—and roughly half of credit union assets are in areas at a relatively high or very high risk of experiencing a natural disaster due to tornado. Similarly, large share of credit union assets are in areas exposed to strong winds. In addition, the NCUA Board is seeking comments on current and future climate-related financial risks to federally insured credit unions and related entities. Through this consultation, NCUA would strengthen its ability to identify and assess credit unions’ current and future climate and natural disaster risks as well as enhance its supervision and regulation of each regulated entity’s management of such risks. NCUA seek stakeholder views on risks posed to, or stemming from, field of membership, lending, investments, other assets, deposits, underwriting standards, insurance coverage, liquidity, and capital. The comment period for the consultation on climate-related financial risk will be ending on June 26, 2023.
The interagency policy statement on allowance for credit losses has been revised to remove references to Troubled Debt Restructurings (TDRs) and conform with changes to the U.S. generally accepted accounting principles (GAAP). This policy statement describes the measurement of expected credit losses in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 326 and includes processes for the design, documentation, and validation of expected credit losses. The policy statement also addresses internal controls over these processes, the maintenance of appropriate allowances for credit losses, the responsibilities of boards of directors and management, as well as examiner reviews of allowances for credit losses. The principles described in the revised statement are consistent with U.S. GAAP, regulatory reporting requirements, safe-and-sound banking practices, and the agencies’ codified guidelines establishing standards for safety and soundness. The revised statement will take effect at the time of each institution’s adoption of FASB ASC Topic 326.
Keywords: Americas, US, Banking, Accounting, ESG, Climate Change Risk, Physical Risk, Credit Risk, Topic 326, CECL, IFRS 9, US GAAP, Reporting, FASB, US Agencies, FDIC, OCC, FED, NCUA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
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