Submitted by sevans on Fri, 11/14/2014 - 3:51pm

What are basic review procedures for examiners related to concentration risk?

The following are some basic review steps and questions examiners should ask when conducting a review of concentration risk. Examiner expectations for the depth and sophistication of the responses from credit union management should increase if the initial review of a credit union’s balance sheet reveals potentially high exposure.

  • Does the credit union have policies directly related to identifying, measuring, monitoring, and controlling concentration risk? Examiners should ensure credit unions consider the following when evaluating the board policies:
    • The level and nature of inherent risk on the balance sheet;
    • Management expertise;
    • Risk management practices;
    • Market conditions; and
    • Adequacy of reserves allocated for concentration risk.
  • Has the credit union developed appropriate policies and procedures, including establishing acceptable risk limits for each product and service on an individual and aggregate basis?
  • Has management assessed the adequacy of net worth based on the aggregate potential exposure to all forms of concentration risk, while also considering the potential credit, interest rate, and liquidity risk impact on net worth?
  • Has the credit union considered the various types of concentrations and their interrelationship, particularly between asset classes or common products and service characteristics, which may present higher risk when aggregated?
  • Has the credit union considered the “event risks” that may expose them to financial loss for each asset class, quantified the risk, and established appropriate risk tolerance limits based on the probability and potential impact from each event?
  • Do the board and senior management receive regular reports on the individual and aggregate exposure to concentration risk?
  • Does management have predetermined actions to take when risk limits are reached? Do they take the appropriate action? A material red flag is a credit union that simply raises the established limit when it is reached without advanced analysis supporting the rationale for the change in policy.Is the credit union’s system of identifying, measuring, monitoring, and controlling concentration risk commensurate with the level of potential concentration risk exposure? 
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