Development Best Practices in Credit Union Supervision: Examination Process - Institutional Capital and Profitability

This paper details a part of the examination process that studies institutional capital and profitability. The paper provides:

• Definition of institutional capital;
• Its importance for the credit union's future;
• Reasons for the existence of capital accounts.

The paper then discusses:

• The objective of the capital review, which is to determine that:
  • The board has established a capital accumulation strategy that states the capital goal ratios, financial plan and time frame for achieving the goals,
  • There is sufficient capital as opposed to operational risk, etc;
• Scope of the capital review, highlighting the factors to be considered when determining the adequacy of capital;
• Institutional capital review and the procedures that examiners should use to review capital accounts;
• Signs of warning like, ratios, numbers, trends or suspicious activity that may indicate existing or potential problems;
• Objective of profitability review, which is to determine:
  • Income and expense trends,
  • Actual operating results, etc;
• Its scope, which would include a review of the income statement, income and expense accounts with negative trends and ratios that assess profitability;
• The process of the profitability review, which should include a review of the credit union's general financial condition.

The paper concludes by listing signs of warning that indicate existing or potential problems.