In its second "Board Briefing" since Chairman Rick Metsger introduced the practice of having National Credit Union Administration staff brief the agency's governing body on selected issues, officials outlined their plans to add an "S" – for interest rate sensitivity – to the regulator's existing "CAMEL" examination rating system.
The existing CAMEL system evaluates capital adequacy, asset quality, management capability, earnings and liquidity.
Bank regulators added interest rate sensitivity to their evaluation guidelines in the late 1990s. NCUA chose not to do so at that time because credit union balance sheets were relatively simple, including few long-duration assets.
In recent years, however, credit union operations have grown increasingly complex, prompting regulators to re-examine the issue.
"This idea has been discussed for several years, and the time is ripe to make a formal proposal," Metsger said at the Board's monthly meeting Thursday.
According to Metsger, 16 state credit union regulatory agencies have moved to CAMELS and another five are considering the change.
In a letter sent to NCUA earlier this week, National Association of State Credit Union Supervisors President and Chief Executive Lucy Ito noted that 16 state credit union regulatory agencies have adopted CAMELS and another five are considering the change. Ito urged the agency to adopt CAMELS "earlier rather than later," noting the potential for rising interest rates could adversely affect a number of institutions.
NCUA's plan would not involve issuing any new regulations. Credit unions' interest rate risk would fall into one of four categories, low, medium, high and extreme.
Citing the healthy capital rations most credit unions maintain, Cole said few credit unions would see their overall examination results suffer under a CAMELS system. Interest rate sensitivity at most institutions would be rated low or moderate, J. Owen Cole, president of NCUA's Central Liquidity Facility, said Thursday. "It's a very small subset that might be rated high," he said.
According to Fazio, director of the agency's Office of Examination and Insurance, the benefits of adding the risk sensitivity element include greater clarity, accuracy and transparency in how interest rate risk is assessed, which would allow examiners to focus more of their time on "outlier" institutions.
Although he stopped short of endorsing a change to CAMELS, board member J. Mark McWatters said he hears frequent complaints about how examiners evaluate interest rate risk under the current system.
"I think we have a little bit of a credibility issue," McWatters said Thursday. "One consistent issue people have brought up is examiners' directives to sell assets at a loss because of interest rate risk."
Fazio recommended drafting a proposal and releasing it for public notice and comment. The comment-and-review process, subsequent program changes and implementation could take as many as three years, Metsger added.
Ultimately, the agency would implement CAMELS by revising its examination practices to include the proposed rating system. It's an opportune time to consider such a project, moreover, since NCUA is preparing to overhaul examination procedures as part of the recently announced Exam Flexibility Initiative, Jay Owen Cole, president of NCUA's Central Liquidity Facility, noted Thursday.
In November, NCUA's inspector general office examined the agencies interest rate risk policies and procedures and concluded it should adopt the CAMELS system.
Carrie Hunt, executive vice president of government affairs and general counsel at the National Association of Federal Credit Unions, gave a tentative endorsement to NCUA's interest rate risk plans Thursday.
"While NCUA heeded our recommendation to address interest rate risk on the exam side rather than through additional regulation, we remain cautious as we examine the details of the supervisory test and the full impact of the addition of 'S' to the CAMEL rating system on credit unions," Hunt said in a statement. "We also encourage the agency to publish advance notice of any contemplated rule to give credit unions sufficient time to comment."
