TAP is a comprehensive process that requires examiners to look beyond individual facts and "static" balance sheet figures to determine the true financial condition, quality of service, and risk potential of supervised credit unions. The goal of TAP is to accurately and holistically assess a credit union based upon a sum of its parts—in other words, to not "lose sight of the forest for the trees."
As part of TAP, examiners will review numerous financial ratios and perform a series of data analyses. This analysis helps examiners understand a credit union's financial ratios both individually and as part of an interrelated system, where trends or risk exposures in one area can affect another. Examiners also look at financial indicators such as adverse economic trends, unusual growth patterns, or concentration levels. These indicators can serve as triggers of changing risk and possible future problems. When negative indicators are present, examiners must determine the action needed to reverse unfavorable trends and formulate, with credit union management, recommendations and plans to ensure implementation of these actions.
TAP helps examiners assess critical aspects of a credit union's operations: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity/ALM, and Sensitivity to Market Risk (CAMELS). TAP is also used when examiners assess the seven critical risk areas (Credit, Liquidity, Interest Rate, Compliance, Strategic, Transaction, and Reputation). Each risk area is assigned a rating of low, moderate, or high, as well as a "direction" (increasing, decreasing, or unchanged).
The culmination of TAP occurs with the examiner assigning a rating of 1 to 5 to each of the CAMELS components (a "component rating") and an overall score (the "composite rating"). The CAMELS rating system provides an accurate and consistent assessment of a credit union’s financial condition and operations, measures risk, and is used to allocate supervision resources.
NCUA examiners are required to use the total analysis process described in this guide. TAP includes the following steps:
- Collecting data
- Reviewing data
- Analyzing and interpreting data
- Reaching conclusions
- Making recommendations and developing plans for action.
Valid TAP results depend on the examiner considering and accurately interpreting all pertinent data. The examiner then has the tools to make meaningful recommendations and design action plans that will mitigate unacceptable risks.
Inappropriate recommendations and action plans may result if an examiner does not properly apply TAP. To reduce this possibility, examiners:
- Perform a final review of all data
- Discuss analysis, risk assessments, and conclusions with management
- Ensure that recommendations and action plans are practical, specific, and understandable
- Ensure that the plans will achieve an appropriate level of risk reduction
Last updated May 01, 2023
