Board proposes adding ‘S’ component to exam rating system

(Jan. 15, 2021) Adding an “S” for “market sensitivity” to the examination rating system for NCUA was proposed unanimously by the agency Board Thursday, an addition long supported by NASCUS for the federal regulator – especially since 24 states have already incorporated the component into their own exams.

The proposal would also redefine the “L” (Liquidity Risk) component in the existing rating system – and change the name to “CAMELS” (from the existing “CAMEL”).

Nearly five years ago, NASCUS wrote to NCUA urging the change and adding the “S” component. “NASCUS and state supervisory agencies encourage NCUA to consider earlier adoption of ‘CAMELS,’” NASCUS’ Lucy Ito wrote in the June 2016 letter to the board. “We again note that the separation of the ‘S’ component does not require a credit union to develop additional management system enhancements where market risk is already appropriately identified, measured, monitored and managed as part of the ‘L’ component.”

She also noted that in states that have adopted CAMELS (now totaling 24 – up from 16 when she wrote the letter), that regulators and credit unions have reported 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.

Both Board Chairman Rodney Hood and Member Todd Harper mentioned NASCUS’ position on the S component, or the June 2016 letter, in their remarks – and stressed the importance of reaching out to the state system to discuss the proposal.

NCUA said that the proposal issued Thursday (for a 60-day comment period) would likely take effect in the first quarter of 2022 if adopted.

The agency asserted the proposal would provide greater clarity and transparency regarding credit unions’ sensitivity to market risk and liquidity risk exposures once adopted. “The proposed addition would make the NCUA’s rating system more consistent with the other financial institution regulators’ ratings system both at the federal and state levels,” the agency said.

The agency indicated that separating the “S” and “L” component ratings will allow NCUA to enhance:

  • Monitoring of sensitivity to market risk and liquidity risk in the credit union system;
  • Communication of specific concerns to individual credit unions; and
  • Allocation of resources.

“In general, the NCUA Board expects that adopting a sixth CAMELS rating component will not have any adverse effect on a credit union’s CAMEL composite rating,” the agency wrote in its proposal. “The proposed separation of sensitivity to market risk and liquidity risk into individual CAMELS rating components will reduce potential rating inconsistencies.”

Notice of Proposed Rulemaking, Parts 700, 701, 703, 704 and 713, CAMELS Rating System