Paper
Development Best Practices in Credit Union Supervision: Examination Process - Institutional Capital and Profitability
How important is it to examine credit unions' capital and profitability?
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4 pages
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.
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