Board discusses S rating in CAMEL, IRR changes

June 16, 2016 -- A “sensitivity to market risk” component (or an “S”) for the NCUA CAMEL rating system likely won’t be ready for use “for a few years,” the NCUA Board heard during a special board briefing on the proposed, new component. However, no decision has yet been made on whether to proceed.

The briefing was held as part of the regular, open meeting of the NCUA Board Thursday in Alexandria, Va.

Initiating an “S” component was recommended by the agency’s Office of Inspector General (OIG) in a Nov. 13, 2015 report, as well as a revision of 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.”

However, in the report, the OIG also pointed out that any change to the two components cannot come before the end of 2018, “because the process involves regulation changes, reprogramming of multiple data systems, and revisions to examination policies and procedures.”

In a letter to NCUA Board members this week in advance of today’s briefing, NASCUS President and CEO Lucy Ito urged the board to adopt the rating for federally insured credit unions “earlier rather than later.”

In the letter, Ito wrote that in states that have adopted CAMELS (16 to date, with five more considering it), regulators and credit unions report positive outcomes with nearly no additional regulatory burden. She stated that, in practice, state supervisors have continued to use the same examination procedures for assessing liquidity and interest rate risks. However, she wrote, by rating the “L” and “S” components separately—rather than in a combined component—state regulators have been able to provide better information to credit unions to clearly delineate analysis between liquidity risk and interest rate risks.

In a release, NCUA pointed out that, presently, it assesses interest rate risk as part of the liquidity rating. Federal banking supervisors, however, already include an “S” in the rating system, as do 16 state credit union regulators. Five additional state credit union regulators are working to adopt this approach, the agency noted in the release (citing statistics provided by NASCUS).

At Thursday’s briefing, NCUA staff acknowledged use of the S rating by states (and Board Chairman Rick Metsger acknowledged Ito’s letter to him and Board Member Mark McWatters). Both Metsger and McWatters indicated that they intend to follow up with Ito and NASCUS about the S rating and states use of it.

During presentation, NCUA staff recommended that the agency solicit comments on both the S rating and on new interest rate risk (IRR) guidelines for credit unions. Those guidelines would establish four risk categories: low, medium, high and extreme. The focus, staff said, would be on the extreme category (although it would rely on credit unions’ in-house stress tests).

During a Q&A, Metsger noted the five more state supervisory agencies are now making the move since the board first started talking about IRR. He asked whether under the Administrative Procedures Act NCUA will be required to open the entire CAMEL system to review as a result of adding the S rating. Staff said that’s likely.

Additionally, the NCUA Chairman asked if credit unions would receive specific guidance on the new IRR measure and changes in CAMEL. Staff responded that it expects to send a Letter to Credit Unions and attach to it excerpts of the exam scope questions and the guidance sent to examiners. The letter is expected to be sent in late July or early August.

In other action, the NCUA Board:

  • Approved technical amendments to Part 705 of its rules and regulations regarding its Revolving Loan Fund.
  • Agreed to a technical change to Part 747 of its rules and regulations related to civil money penalties and adjustments for inflation.

Letter from Lucy Ito to NCUA Board members re: S rating in CAMEL