OIG: NCUA should add an “S” to CAMEL to reflect market risk
Dec. 1, 2015 -- NCUA should add an “S” for market risk sensitivity to its CAMEL rating system, and revise the “L” to reflect only liquidity factors, because the current system “may not be effectively capturing interest-rate risk (IRR) when assigning a composite CAMEL rating to a credit union,” according to a Nov. 13 report of the agency’s Office of Inspector General (OIG).
However, any change by NCUA to the two components won’t come before the end of 2018, the report states, “because the process involves regulation changes, reprogramming of multiple data systems, and revisions to examination policies and procedures.”
Ten states already use the “S” component, and more are considering it.
The report, (#OIG-15-11, “Review of NCUA’s Interest Rate Risk Program”) which is the result of a “self-initiated” audit by the OIG, states that NCUA currently assesses sensitivity to market risk under the "L" in its CAMEL rating. “However, combining sensitivity to market risk with liquidity may understate or obscure instances of high IRR exposure in a credit union,” the report notes. “The addition of an ‘S’ rating to its CAMEL Rating System to capture and separately assess a credit union’s sensitivity to market risk should improve NCUA’s ability to accurately measure and monitor interest rate risk,” the report concludes.
According to the report’s executive summary, the audit leading to the report was aimed at determining whether the agency’s IRR policy and procedures help to effectively reduce IRR, and what action the agency has taken or plans to take to identify and address credit unions with IRR concerns.
The report states that the addition of an “S” component to the CAMEL rating system, “should improve NCUA’s ability to accurately measure and monitor interest rate risk.”
The 10 state supervisory authorities that have already adopted the “S” component are Connecticut, Michigan, Maine, Texas, Washington, Massachusetts, Colorado, New Hampshire, Utah and Vermont. At least another four states are considering the addition of the “S.”