BOSTON—Massachusetts’ state regulator is adding a new component—and an “S”—to CAMEL ratings to reflect added focus on Sensitivity to Market Risk.
The state’s Division of Banks said Sensitivity to Market Risk is being given its own component rating rather than being included as a factor in the “Liquidity” or “L” component rating and will reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect earnings and/or net worth.
For most institutions the analysis is centered in interest rate risk, the Division of Banks said. The new CAMELS examinations will go into affect after April 1, 2015.
“To date, the Division has utilized the NCUA’s method of assigning five component ratings to credit unions under the CAMEL rating system,” said David J. Cotney, Commissioner of Banks, in a letter to state-chartered credit unions. “This includes combining the assessments of Liquidity and Sensitivity to Market Risk into the single ‘L’ component. Nearly two decades ago, the Federal Financial Institutions Examination Council (FFIEC)…added a sixth component to its Uniform Financial Institution Rating System (UFIRS) to incorporate Sensitivity to Market Risk. Accordingly, the analysis of a bank’s sensitivity to market risk is performed separately from the analysis of liquidity, resulting in an “S” component and a modification of the CAMEL acronym to CAMELS.”
Cotney said the division’s examiners have been rating the “L” and “S” components individually since 1997 when examining banks and that the approach has served both the banks and regulators well.
“As the analyses of liquidity and sensitivity to market risk each grow in complexity and importance, assigning each component its own rating is appropriate and more transparent,” said Cotney. “In fact, the Division notes that many bank examination reports reflect differing ‘L’ and ‘S’ ratings based on the strengths or weaknesses found within each of these components.”
Cotney told credit unions the implementation of the change will not increase the regulatory burden, and noted that at least five other state CU regulators have already adopted the FFIEC’s CAMELS rating system.
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