Compliance Blog

Mar 16, 2022

NCUA CAMELS Rating System Going Live on April 1, 2022

In October of 2021, the NCUA approved a final rule adding a new component to the CAMEL Rating System: ‘S’ for Sensitivity to Market Risk.  In March of 2022, NCUA issued Letter to Credit Unions 22-CU-05, which addressed the final rule, and discussed the changes credit unions can expect under the new regime.  The CAMELS Rating System goes live on April 1, 2022.

Two camels

Prior to the April 1 effective date, NCUA staff will receive training on how to evaluate the new ‘S’ component and the updated ‘L’ component.  In addition, the training will be made available to state regulators’ offices, for those that elect to use the CAMELS rating system.  There is also an industry training webinar planned for credit unions, which seeks to provide a greater understanding of the updates to credit union stakeholders.

NCUA differentiates the new ‘S’ component from the ‘L’ (Liquidity Risk) component in its letter.  Per NCUA, “the new Sensitivity to Market Risk component rating reflects the exposure of a credit union’s current and prospective earnings and economic capital arising from changes in market prices and interest rates.  The Liquidity Risk component rating reflects a credit union’s ability to monitor and manage liquidity risk and the adequacy of liquidity levels.”  NCUA does not expect that the addition of the ‘S’ component will considerably affect or alter the examination process, and it will not be an additional “burden” to credit unions.  The letter includes two enclosures: Appendix A - NCUA’s CAMELS Rating System, and Appendix B – Common Questions and Answers about the CAMELS Rating System.

Appendix A consists of an in-depth overview of the entire CAMELS Rating System, outlining the composite ratings (1-5), and each component rating (Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk).  Only the last two sections (Liquidity and Sensitivity to Market Risk) were updated; the Liquidity section was changed to reflect a credit union’s ability to monitor and manage liquidity risk and the adequacy of liquidity levels, and the Sensitivity to Market Risk section is new, to account for the new ‘S’ component.

The ’S’ component rating will be based on, among other things, the sensitivity of a credit union’s “current and future earnings and economic value of capital to adverse changes in market prices and interest rates; management’s ability to identify, measure, monitor, and control exposure to market risk considering a credit union’s size, complexity, and risk profile; and the nature and complexity of interest rate risk exposure.”

Appendix B provides a listing of common questions and answers about the CAMELS rating system, with the first half dedicated to the new ‘S’ component, and the back half dedicated to general questions about the CAMELS rating system, overall. 

Question 2 asks: “Will credit unions be expected to have formal, sophisticated risk management processes to receive a favorable rating for the ‘S’ component?”  The response reiterates that NCUA expects “the sophistication of a credit union’s risk management process. . . to be commensurate with the complexity of its level of risk exposure, balance sheet composition, off-balance sheet activities, and the credit union’s specific circumstances.”  The formality of a credit union’s risk management process is fairly flexible and generally credit union-specific, based on the complexity of its operations and its risk exposure.  Credit unions are expected to complete a Risk Assessment, and ensure it remains up to date based on changes within the credit union (such as adding products, onboarding new vendors, or doing anything that could add to the credit union’s risk profile).

For small credit unions with limited interest rate risk processes, Question 4 provides that NCUA allows examiners to utilize the automated Estimated Net Economic Value Tool (ENT), which “is NCUA’s estimate of Interest Rate Risk (IRR)” that uses standard sensitivity measurements.

Question 7 discusses that the update to the CAMELS rating system will not result in a change in a credit union’s composite rating, because “the manner examiners use to assign a composite or component rating has not changed due to the revisions in the rating system.”  There is some subjectivity and judgment calls that are allowed within the rating process, which remain the same.  Additionally, examiners have been considering the level of interest rate risk during other sections of examinations, even without being formalized into the ‘S’ component.

Click through to each appendix for even more great information on the CAMELS Rating System, and the upcoming changes.