How Big a Difference Does “S” Make?

February 1, 2021 at 9:38 am Leave a comment

That’s the big question I’m pondering this morning after delving into the proposal by the NCUA Board to amend the erstwhile CAMEL examination system to include a separate category dedicated exclusively to sensitivity to market risk. Is this long overdue change little more than semantics, or somewhere in between? 

The current CAMEL framework stands for – how many of you know the answer before I tell you – Capital Adequacy, Asset quality, Management, Earnings and Liquidity. In contrast, for more than two decades now, the other national bank regulators in many states use CAMELS, which separately evaluates Sensitivity to market risk. The purpose of this S is to ensure examiners independently evaluate interest rate risk. In the preamble to its proposal, NCUA notes that credit unions have become more sophisticated since they decided not to expand the examination framework in 1997. For example, in those pre-millennial days, mortgages accounted for only 19 percent of the industry’s total assets, which has grown to 42 percent as of September 2020. In addition, the call for this extra category has been made over several years, with former board chairman Rick Metsger championing the idea. When NCUA was devising its initial risk-based capital framework for complex credit unions, one of the industry’s criticisms was that interest rate sensitivity is best accounted for by examiner evaluation as opposed to being baked into the asset ratings that were proposed by the NCUA. So on the one hand this proposal is, if anything, overdue.  

But, is it really necessary? For one thing, NCUA already accounts for a credit union’s sensitivity to interest rate fluctuations. As NCUA made clear in this 2000 letter to credit unions detailing the CAMEL rating system, the existing liquidity category includes an assessment of the credit union’s monitoring and control of interest rate sensitivity and exposure. In addition, credit unions with $50 million or more in assets are required to have an interest rate risk policy.

All of which leads me back to where I started. Of course a sophisticated industry of depository institutions needs to assess its exposure to interest rate changes. But if all goes according to plan, this update to the CAMEL system will not have much of an impact on your credit union. 

Entry filed under: Compliance, Mortgage Lending, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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