W E LO O K AT TH I N G S D I F F E R E NTLY
Preparing for a PRISM inspection
November 2013
WE LOOK AT THINGS DIFFERENTLY
Contents of presentation
1.
2.
3.
4.
5.
6.
7.
What is PRISM?
PRISM assessment / rating of credit unions
What is required by CB for a PRISM inspection?
10 Risk Categories under PRISM
Central bank approach
How PRISM inspection is carried out
What issues are coming up from inspections /
Questions???
8. Outcomes - Risk Mitigation Plans (RMP)
9. What next
WE LOOK AT THINGS DIFFERENTLY
1 – What is PRISM?
PRISM is the CB Risk based supervisory framework,
initially rolled out in May 2012
Probability Risk and Impact SysteM
All 11,000 financial institutions are assessed and
given an impact rating .
Impact ratings are determined by following metrics:
(a) Asset Size (b) Regulatory Reserves (c) number of
members)
WE LOOK AT THINGS DIFFERENTLY
1 – What is PRISM?
PRISM is designed to:
• Adopt a consistent approach to risk
• Allocate resources based on impact
• Set level of engagement (e.g. with high impact
firms)
• Ensure action is taken early to mitigate risk
• Analyse better management information about risk
profiles of firms
WE LOOK AT THINGS DIFFERENTLY
1 – What is PRISM?
PRISM management information / database:
• Centralised all credit union data
• Including Prudential Returns, Annual Returns,
Audited accounts + details of any reviews,
assessments of credit unions
• Any PRISM inspection of a CU will feed into the
system
• System sends alerts (e.g. when RRR < 10%)
• Alerts for follow up visits, updates etc
WE LOOK AT THINGS DIFFERENTLY
2 – PRISM assessment / rating of credit unions
Firms are assessed as High Impact, Medium High
Impact, Medium Low Impact and Low Impact
Credit unions are ranked as follows
High Impact
None
Medium High
20 credit unions
Medium Low
248 credit unions
Low
130 credit unions
WE LOOK AT THINGS DIFFERENTLY
2 – PRISM assessment / rating of others
PRISM
Insurance
Banking
Ultra High
1
4
High
12
3
Med High
24
12
Med Low
82
18
Low
149
34
Total
268
71
WE LOOK AT THINGS DIFFERENTLY
2 – PRISM assessment / rating of credit unions
• Supervisory contact is tailored for firms based on
their impact category
• Credit unions will get different levels of attention
• High Impact and Medium High Impact firms proactive supervision
• Low Impact - reactive supervision
• Most credit unions are in Medium Low category so
will have a mixture of both
WE LOOK AT THINGS DIFFERENTLY
2 – PRISM assessment / rating of credit unions
Medium High Impact credit unions
Full PRISM inspection 3-5 days, 3-5 supervisors on-site
Analysis of business model, governance, finances
Full inspection every 3 years
Regular meetings with CB Risk Governance Panel
Occasional Board Meeting attendance
Checks to include analysis of board minutes,
effectiveness of board
WE LOOK AT THINGS DIFFERENTLY
2 – PRISM assessment / rating of credit unions
Medium Low Impact credit unions
Full PRISM inspection , but less frequent given large
number of credit unions . 2 days, 2 supervisors on-site
Semi – automated Return analysis (alerts)
Regular meetings with CB with key officers
Board Meeting attendance much less likely
More hands on approach for problem credit unions
WE LOOK AT THINGS DIFFERENTLY
2 – PRISM assessment / rating of credit unions
Low Impact credit unions
On site PRISM inspection less likely. Only when required
or for problem credit unions (e.g. low RRR)
Semi – automated Return analysis (alerts)
Reactive supervision but breaches of Regulatory
requirements will be acted upon (e.g. low RRR)
WE LOOK AT THINGS DIFFERENTLY
3 - What is required by CB for a PRISM inspection?
• Board Packs (last 12 months)
• Org chart
• Pen picture of board and management
(qualifications, experience)
• Board minutes (last 3 years)
• Supervisory Committee minutes (last 12 months)
• Credit control, investment committee minutes (last
12 months)
WE LOOK AT THINGS DIFFERENTLY
3 - What is required by CB for a PRISM inspection?
Under policies
• Credit and Credit control policy
• Investment policy
• Provisioning policy
• Money Laundering policy
• Liquidity Policy
• Risk management policy
• IT / IS policy (including information security, BCP,
off site back up, management information policy)
WE LOOK AT THINGS DIFFERENTLY
3 - What is required by CB for a PRISM inspection?
Other information required
• Copies of Loan Book Reviews, External Reviews
• Investment statements
• Rescheduled loan reports
• Loan reports (loans by sector, loans by purpose,
connected party loans
• Arrears reports (last 12 months)
• IT/IS reports (SLA with IT vendor, listing of
personnel and vendors with special access)
WE LOOK AT THINGS DIFFERENTLY
3 - What is required by CB for a PRISM inspection?
Other information required
• Copies of management accounts
• Projections and financial plans
• Strategic plan (3 year minimum)
• Risk appetite statement
Note there is substantial material available from the
Monitoring Dept to assist with all of the above. All
available on the ILCU website
WE LOOK AT THINGS DIFFERENTLY
4 - 10 Risk Categories under PRISM
Central Bank assess all firms under 10 risk categories.
Some are more relevant for credit unions than
others.
Credit risk and capital risk are obvious areas of focus
for credit unions with climbing arrears and reserves
being depleted by loan losses
Insurance risk would be a lower priority.
WE LOOK AT THINGS DIFFERENTLY
4 - 10 Risk Categories under PRISM
Risk Category
Types of checks done
1- Credit Risk
Review of loan arrears, provisions,
stress tests
2 -Market Risk
Analysis of investments by
category, review of investment
policy
3 – Capital Risk
Review of capital, fixed assets
4 – Operational Risk Review of compliance with AML,
review of BCP
WE LOOK AT THINGS DIFFERENTLY
4 - 10 Risk Categories under PRISM
Risk Category
Types of checks done
5- Insurance Risk
Review of compliance with S47 CU
Act
6 – Liquidity Risk
Analysis of adequacy of liquidity,
review of liquidity policy
7 – Governance
Risk
Review of experience of CU
personnel, review of risk
management framework
WE LOOK AT THINGS DIFFERENTLY
4 - 10 Risk Categories under PRISM
Risk Category
Types of checks done
8- Strategic Risk
Review of strategic plan, analysis
of projections
9 – Environmental
Risk
Review of macroeconomic trends
to establish potential impact on
credit union
10 – Conduct Risk
Review of compliance with
applicable consumer protection
legislation
WE LOOK AT THINGS DIFFERENTLY
5 - Central bank approach
• CB has outlined they are taking a forward looking
approach, being more proactive and expecting
credit unions to be more proactive
• Approach is to be constructive and challenging
based on analysis of all data (challenging aspect
has been a problem at times)
• There should be open communication (has not
always been the case)
• Supervisors will make judgement calls based on
analysis to build an overall risk profile of the firm
WE LOOK AT THINGS DIFFERENTLY
5 - Central bank approach
• Risk appetite of CB: CB has indicated that any risk
probability rated as medium high/high must be
mitigated
• Focus on risks which, if left unmitigated, could
threaten the financial future of the credit union
(e.g low RRR)
• Wilful non compliance with an RMP action will be
taken seriously
WE LOOK AT THINGS DIFFERENTLY
6 How PRISM inspection is carried out
• Depending on category of credit union, 2-5
inspectors carry out PRISM inspection on site
• The CB team will then meet individually with the
following :
• Chairman and Secretary - to discuss Governance,
Risk and Compliance, high level view of credit
union and the future of the credit union. This
would include discussion of the strategic plan
WE LOOK AT THINGS DIFFERENTLY
6 How PRISM inspection is carried out
• Board and Manager - to discuss financial accounts
of the credit union. This would cover financial
ratios (PEARLS, RRR) returns on assets, strategic
planning. Likely to go through the strategic plan
and the future plans of the credit union in a lot of
detail.
• Supervisory committee / Board Oversight
Committee – to discuss their work and findings.
This would include a discussion of minutes and
recommendations.
WE LOOK AT THINGS DIFFERENTLY
6 How PRISM inspection is carried out
• Overall meeting with the collective Board,
Supervisors (Board Oversight Committee),
Managers - to discuss overall situation and issued
covered in other meetings.
• The Risk Mitigation Plan (RMP) should be discussed
at this point, which should highlight risk areas and
set out work required to mitigate these risks.
• A copy of this RMP should be sent to the credit
union following the inspection and meetings. In
some cases there has been substantial delays in the
RMPs being sent to credit unions.
WE LOOK AT THINGS DIFFERENTLY
7 - What issues are coming up from inspections
Governance Risk
• Limited rotation of Board, no succession plan
• Lack of financial expertise on board
• CU policies not being reviewed annually
• CU policies not being signed off by the board
• Review of policies by Supervisory committee
highlighted issues and not acted upon
• Gap in Board oversight in relation to risk
management and BCP
WE LOOK AT THINGS DIFFERENTLY
7 - What issues are coming up from inspections
Strategic Risk
• No formal strategic plan in place
• No detailed financial projections completed
• Strategic plan does not outline (a) clear objectives,
(b) clear methods of achieving goals (c) a method
for monitoring implementation of plan
• Strategic plan does not set out the system of
review of the plan
WE LOOK AT THINGS DIFFERENTLY
7 - What issues are coming up from inspections
Credit Risk
• Lending policy does not set out in detail (a)
repayment capacity assessment (b) situations
where a board may approve loans to members in
arrears.
• Lending policy does not include detail of (a)
authorisation levels, (b) definition of suitable
debt/income ratio (c) details re top up lending (d)
details re loans in arrears
WE LOOK AT THINGS DIFFERENTLY
7 - What issues are coming up from inspections
Credit Risk
• CU does not have a documented provisioning
policy. Policy must include details on (a) roles and
responsibility, (b) application levels of provisions
for loan impairment categories
• CU does not review provisions quarterly. The
outcome of this review must be documented and
provided to the Board
WE LOOK AT THINGS DIFFERENTLY
7 - Examples of questions ???
Q - Do you think there has been good lending?
Provisions and write offs, has cost members €X
million.
Q – What if your lending continues to fall?
Q – Where will the income come from?
Q – Where is new lending going to come from?
Q – This is a small town, where is the lending going to
come from?
Q - You hope to lend to young members. They did not
borrow before now, what has changed?
WE LOOK AT THINGS DIFFERENTLY
7 - Examples of questions ???
Q – What firms are operating in the town?
Q – What firms have closed in recent years?
Q – Where is BCP? Who maintains the BCP?
Q - Where would you operate from if a fire occured in
main building?
Q – Describe your Board? What qualifications do they
have?
Q – How is your premises being valued? The current
valuation in the accounts is overstated
WE LOOK AT THINGS DIFFERENTLY
7 - Examples of questions ???
Q – Does your board understand their role and
responsibilities?
Q – Describe the skill set of board and management,
are there any gaps?
Q – What is the role of the board in the formulation of
the financial projections?
Q – How is board oversight exercised (e.g policy
review)
Q – How does board split time between operational
and strategic implementation?
WE LOOK AT THINGS DIFFERENTLY
7 - Examples of questions ???
Q – Describe the current business model
Q – How does the credit union plan to improve it’s
financial performance?
Q – Are KPIs compared to Peer Credit Unions?
Q – With what rate of Reserves would the credit union
be satisfied?
Q – What aspects of governance framework pose a
risk?
WE LOOK AT THINGS DIFFERENTLY
7 - Examples of questions ???
Q – What is the loan book breakeven point?
Q – Did you consider reducing the loan rate for loans
within shares?
Q - Do you see any risk in Spanish Government Bonds?
Q – Have you considered de-leveraging?
Q – Have you ever consider reducing the LPLS or DBI
costs?
Q – Has the credit union being topping up loans to
hide arrears?
WE LOOK AT THINGS DIFFERENTLY
8 - Outcomes - Risk Mitigation Plans (RMP)
• Risk Mitigation Plans will be devised following
inspections, and issued to credit unions.
• These plans will set out deadlines for remediation
actions
• The RMP will be tracked and will form the basis of
follow up by the CB
• Deadlines will change depending on nature of
remediation actions required
• The RMP should be discussed at meetings with
credit union personnel
WE LOOK AT THINGS DIFFERENTLY
8 - Outcomes - Risk Mitigation Plans (RMP)
RMP examples – PRISM inspection Sept 2012, RMP
received January 2013.
Issue
Lack of defined underwriting policy
Lack of provisioning policy
Counterparty exposure above 25%
Strategic plan does not set out goals
Deadline
Mar 2013
Mar 2013
June 2013
Mar 2013
WE LOOK AT THINGS DIFFERENTLY
8 - Outcomes - Risk Mitigation Plans (RMP)
RMP examples – PRISM inspection July 2012, RMP
received August 2012
Issue
No integrated strategic plan
CU does not stress test capital
Limited rotation of board (policy)
Lending policy lacking detail
Deadline
TBC
Dec 2012
Dec 2012
Dec 2012
WE LOOK AT THINGS DIFFERENTLY
9 – What next., how to survive PRISM
How to survive
Prepare a
Risk
Appetite
Statement
Prepare a
Risk
Managemen
t system
Assess and
score Risks
Create Risk
Mitigants
(e.g policies,
procedures,
training)
Report to
Board
WE LOOK AT THINGS DIFFERENTLY
9 – What next., how to survive PRISM
• Help available from the League
• Risk Management system in place (Risk Appetite,
Risk Scoring)
• Explanatory notes issued
• Training available from Monitoring
• No need to “buy in” an IT based Risk Management
system at extra cost to the CU
• Draft policies under all various categories available
on the League website
WE LOOK AT THINGS DIFFERENTLY
Thank you for your time
www.creditunion.ie for more help
Tom Kiely, tkiely@creditunion.ie
Dave Hewson, dhewson@creditunion.ie