As Prepared for Delivery on October 21, 2021
Thank you, Tom, and team for your presentation. The addition of sensitivity to market risk as a component to the existing CAMEL ratings should provide credit unions and the NCUA more transparency on interest rate risk in federally insured credit unions. Separating interest rate risk from liquidity risk should also make the examination process more efficient. For those reasons, I support this change.
Banking regulators have done this for years, and while we don’t have any obligation to follow what they do, the fact is that adding the “S” to CAMELS doesn’t appear to have caused trouble.
While distinguishing between the management of funds and the sensitivity to interest rate risk is more precise and therefore a more desirable method for evaluating risk, I am concerned that the implementation could be disruptive especially for credit unions under $50 million in assets. More than 50 percent of federally insured credit unions fall in this category, and as we know, they are hit hardest by even the most modest regulatory changes. Just because NCUA was already evaluating interest-rate-risk doesn’t mean credit unions don’t have extra work to do to comply with today’s rule.
Currently, credit unions with less than $50 million in total assets are not required by regulation (Part 741.3(b)(5)) to have a separate interest rate risk (IRR) policy therefore examiners will not cite credit unions less than $50 million for not having an interest rate risk policy. Credit unions do not need to do anything differently. NCUA’s examination of IRR will remain constant during the transition to CAMELS.
A number of credit unions have expressed concern that a separate rating for IRR could impact their overall CAMELS rating. I understand that the underlying framework to assign the composite CAMELS rating is not changing, and that the composite does not represent an arithmetic average of assigned component ratings.
I do have a question on this: Is it accurate to say for credit unions where the liquidity risk and sensitivity to market risk remain at the same levels from an exam under CAMEL, the composite CAMELS rating is highly unlikely to change? Can you elaborate on that, please?
Thank you for that explanation. Mr. Chairman, I have no further questions.