Are You Ready to Deal with CAMELS?
I know that you are easing into those lazy, hazy days of summer. But there’s an operational change on the horizon that you should take the time to consider. Specifically, it is only a matter of time before an S gets added to the CAMEL rating.
This S stands for a separate category for examiners to assess your credit union’s sensitivity to interest rates. If you remember, when NCUA was proposing changes to its Risk-Based Capital requirement for complex credit unions, one of the concerns with its initial proposal was that it was using its Risk Weightings as a means of guarding against interest rate risk. NCUA agreed and when it finalized the Risk-Based Capital proposal, it instead put credit unions on notice that it would be looking for other ways to deal with interest rate risk. At its June 16th Board Meeting, the Board got an update of staff work in this area. It put credit unions on notice that a formal interest rate sensitivity proposal would probably be proposed in the next few months.
This is a change that is overdue. Banks have already been subject to the S. Specifically the following factors are already part of banking examinations, including:
- The sensitivity of the financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices, or equity prices.
- The ability of management to identify, measure, monitor, and control exposure to market risk given the institution’s size, complexity, and risk profile.
- The nature and complexity of interest rate risk exposure arising from nontrading positions.
- Where appropriate, the nature and complexity of market risk exposure arising from trading and foreign operations.
To me, there are two questions for credit unions as the NCUA moves to adopt a similar framework. First, is there an asset size below which the traditional CAMEL system remains adequate? Second, are examiners going to be trained to be cognizant of the difference between assessing an institution’s exposure to interest rate gyrations and micromanaging credit unions’ judgment about how best to grow in a low interest-rate environment that isn’t going to change any time soon?
On that note, have a nice day.