WASHINGTON—Changes to NCUA’s rating system—to CAMELS from CAMEL—go into effect today.
The CAMELS system, which stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, and now, Sensitivity to market risk, was approved by the NCUA board in 2021.
Under the CAMELS rating system:
- The “S” component addresses sensitivity to market risk and interest rate risk (IRR) governance. It documents a credit union’s market sensitivity level and how the credit union measures, monitors, and manages market sensitivity.
- The “L” component evaluation has been modified to only consider available sources of funds and liquidity risk management It documents a credit union’s liquidity risk level and the credit union’s liquidity risk management program.
NCUA Letter Published
NCUA issued a Letter to Credit Unions (22-CU-05) recently with appendices, including the updated CAMELS rating system and addressing common questions regarding the updated system.
As CUToday.info reported here at the time the NCUA board OK’d the addition of the “S” component, The CAMEL rating system, for Capital adequacy, Asset quality, Management, Earnings and Liquidity, was first developed in 1979, with NCUA adopting it in 1987 (prior to which it used the “Early Warning System”).
Since 1987, NCUA updated CAMEL 10 times, the latest of which was issued in 2007.
“Since then we have seen a significant increase in the total assets in the industry and an increase in concentrations in products such as fixed-rate real estate loans and investments,” said NCUA staff.
‘Enhanced Clarity’
Staff told the board that adding the S component for sensitivity to market risk and redefining the L component to evaluate credit risk will provide enhanced clarity and transparency to credit unions and will improve communication by examiners.
Staff further said from a functional examinational perspective, a couple of foundational elements are already in place, and NCUA’s MERIT also includes the foundation to add the S component.
For many state-chartered CUs, the CAMELs system will not be new. The National Association of State Credit Union Supervisors said a rating system that includes the 'S' component, matching the standard is already used by 24 states.
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