CAMELS Rating System
| Published date | 27 October 2021 |
| Citation | 86 FR 59282 |
| Record Number | 2021-23332 |
| Section | Rules and Regulations |
| Court | National Credit Union Administration |
Federal Register, Volume 86 Issue 205 (Wednesday, October 27, 2021)
[Federal Register Volume 86, Number 205 (Wednesday, October 27, 2021)]
[Rules and Regulations]
[Pages 59282-59289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23332]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 700, 701, 703, 704, and 713
RIN 3133-AF32
CAMELS Rating System
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (the Board) is updating the NCUA's supervisory
rating system from CAMEL to CAMELS by adding the ``S'' (Sensitivity to
Market Risk) component to the existing CAMEL rating system and
redefining the ``L'' (Liquidity Risk) component. The benefits of adding
the ``S'' component are to enhance transparency and allow the NCUA and
federally insured natural person and corporate credit unions to better
distinguish between liquidity risk (``L'') and sensitivity to market
risk (``S''). The addition of ``S'' also enhances consistency between
the supervision of credit unions and financial institutions supervised
by the other banking agencies. The effective date of the rule will be
April 1, 2022. The Board plans to implement the addition of the ``S''
rating component and a redefined ``L'' rating for examinations and
contacts started on or after April 1, 2022.
DATES: The rule becomes effective April 1, 2022.
[[Page 59283]]
FOR FURTHER INFORMATION CONTACT: Thomas Fay, Director of Capital
Markets at (703) 518-1179 or Robert Bruneau, Senior Capital Markets
Specialist at (703) 945-2491, Office of Examination and Insurance; or
Marvin Shaw, Senior Staff Attorney, Office of General Counsel, at (703)
518-6540.
SUPPLEMENTARY INFORMATION:
I. Legal Authority and Background
The Board is issuing this final rule pursuant to its authority
under the Federal Credit Union Act (the Act).\1\ Under the Act, the
NCUA is the chartering and supervisory authority for federal credit
unions (FCUs) and the federal supervisory authority for federally
insured credit unions (FICUs).\2\ The Act grants the NCUA a broad
mandate to issue regulations governing both FCUs and FICUs. Section 120
of the Act is a general grant of regulatory authority and authorizes
the Board to prescribe regulations for the administration of the
Act.\3\ Section 209 of the Act is a plenary grant of regulatory
authority to the NCUA to issue regulations necessary or appropriate to
carry out its role as share insurer for all FICUs.\4\ The Act also
includes an express grant of authority for the Board to subject
federally chartered central, or corporate, credit unions to such rules,
regulations, and orders as the Board deems appropriate.\5\
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\1\ 12 U.S.C. 1751 et. seq.
\2\ 12 U.S.C. 1752-1775.
\3\ 12 U.S.C. 1766(a).
\4\ 12 U.S.C. 1789.
\5\ 12 U.S.C. 1766(a).
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As part of its supervisory activities, the NCUA adopted the CAMEL
rating system in 1987.\6\ Through CAMEL ratings, the NCUA sought to
account for and reflect all significant financial, operational, and
management factors that examiners assess in their evaluation of a
credit union's performance and risk profile. Under this system, as
specified in the 2007 Letter to Credit Unions (LCU), the NCUA assigns
each credit union a composite CAMEL rating and five component ratings
based on the agency's evaluation of a credit union's financial
condition and operations.\7\ The five components address a credit
union's:
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\6\ NCUA LCU No. 93 (September 25, 1987).
\7\ NCUA LCU 07-CU-12 (December 2007).
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Capital adequacy;
Asset quality;
Management;
Earnings; and
Liquidity and asset liability management.
Examiners assign composite and component CAMEL ratings using a
scale that ranges from ``1'' to ``5.'' The highest rating is a ``1,''
indicating the strongest performance and risk management practices, and
the least degree of supervisory concern. The lowest rating is a ``5,''
indicating the weakest performance, inadequate risk management
practices, and the highest degree of supervisory concern. Examiners
rate these components based upon qualitative and quantitative factors
using their professional judgement.
In 1997, members of the Federal Financial Institutions Examination
Council (FFIEC), with the exception of the NCUA, proposed and
subsequently adopted revisions to the Uniform Financial Institutions
Rating System (UFIRS).\8\ The FFIEC released a Policy Statement at that
time to reaffirm the five CAMEL rating system components and added a
sixth component, Sensitivity to Market Risk (``S''), to address price
and interest rate risks (IRR).\9\ The NCUA opted not to use the ``S''
component based on the relative lack of complexity in the consolidated
balance sheets of credit unions at the time. Instead, the NCUA retained
its existing CAMEL rating system.
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\8\ At the time, the FFIEC was comprised of the Federal Deposit
Insurance Corporation (FDIC), the Board of Governors of the Federal
Reserve (Federal Reserve), and the Office of the Comptroller of the
Currency (OCC), the NCUA, and the Office of Thrift Supervision,
which merged into OCC as a result of the Dodd Frank Wall Street
Reform and Consumer Protection Act. See Section 312 of Public Law
111-203.
\9\ 62 FR 752, (Jan. 6, 1997).
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However, since 1997, credit union balance sheets have grown larger
and more complex. For example, the credit union industry significantly
increased the percentage of holdings in mortgage related assets to
total assets from 19 percent in 1997 to 45 percent in June 2021.
Accordingly, the NCUA has made several modifications to the CAMEL
rating system since 1997. These involved changes to financial ratios,
adding and subsequently eliminating a CAMEL matrix, accommodating the
adoption of Prompt Corrective Action, and incorporating the NCUA's
risk-focused exam approach.10 11
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\10\ In 1998, Congress enacted the Credit Union Membership
Access Act (Pub. L. 105-219, 112 Stat. 913 (1998)), which amended
the Act to require the NCUA to adopt, by regulation, a system of
prompt corrective action consisting of minimum capital standards and
corresponding remedies to improve the net worth of federally insured
``natural person'' credit unions.
\11\ NCUA LCU 00-CU-08 (November 2000)--superseded by NCUA LCU
03-CU-04; NCUA LCU 07-CU-12 (December 2007); NCUA LCU 03-CU-04
(March 2003)--superseded by NCUA LCU 07-CU-12; NCUA LCU 19-CU-01
(January 2019).
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As balance sheets of natural person credit unions have become
larger and more complex, the NCUA has consistently provided supervision
and guidance regarding IRR to the credit union industry. The NCUA also
advised credit unions that IRR was a supervisory priority from 2012
through 2019.\12\
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\12\ See, e.g., NCUA LCU 19-CU-01 (January 2019).
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In 2012, the Board implemented regulations that introduced
standards and expectations affecting examiner procedures and the NCUA's
IRR assessment requirements. The NCUA's IRR rule became effective for
credit unions in September 2012. The rule requires insured credit
unions that have more than $50 million in assets to maintain a written
IRR policy and an effective IRR management program.\13\
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\13\ 77 FR 5155 (Feb. 2, 2012). See 12 CFR 741.3, 12 CFR 741,
app. A.
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In April 2014, the NCUA also finalized its derivatives rule and
subsequently amended it in May 2021. The amendments modernize the
NCUA's derivatives rule and make it more principles-based, while
retaining key safety and soundness components. The changes provide more
flexibility for qualified FCUs to manage IRR through the use of
derivatives.\14\
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\14\ 86 FR 28241 (May 26, 2021).
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In January 2017, the NCUA also implemented its revised IRR
supervision program incorporating the regulatory requirements from
Sec. 741.3(b)(5) (IRR) and subpart B to part 703 (derivatives),
enhancing examiner guidance, improving the consistency of IRR ratings,
and identifying outlier credit unions with excessive IRR levels.\15\
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\15\ NCUA LCU 16-CU-08 (October 2016).
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II. Proposed Rule
On January 14, 2021, the Board approved issuing a notice proposing
to amend the existing CAMEL rating system by adding an ``S'' component
to assess sensitivity to market risk and modify the ``L'' component to
include only liquidity evaluation content and rating criteria.\16\ The
Board explained that these changes would provide greater clarity and
transparency regarding credit unions' sensitivity to market and
liquidity risk exposures. The Board further explained that the proposed
changes would make the NCUA's rating system more consistent with the
other banking agencies' rating systems at the federal and state
levels.\17\
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\16\ 86 FR 13494.
\17\ The banking regulators (Federal Reserve Board, FDIC, and
OCC) each include the ``S'' component to evaluate sensitivity to
marketplace risk. In addition, as of January 2021, 24 SSAs have
adopted the ``S'' component.
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In support of the proposal, the Board explained that changes in the
size and complexity of FICUs warranted the
[[Page 59284]]
changes and that increased complexity typically requires greater focus
on interest rate and liquidity risk profiles.
The Board noted that separating the ``S'' and ``L'' component
ratings will allow NCUA to better:
Monitor sensitivity to market and liquidity risks in the
credit union system;
Communicate specific concerns to individual credit unions;
and
Allocate resources.
III. Final Rule and Public Comments on the Proposed Rule
The Board solicited public comments over a 60-day comment period
and received 16 comments. Commenters included credit union trade
associations, state credit union leagues, an organization of state
credit union supervisors, credit unions, and individuals. Most
commenters supported the proposal. Several expressed concern about the
proposal's implementation, particularly about the associated compliance
costs and the need for consistent application across the NCUA regions
and examiners.
As noted previously, commenters generally supported the proposal,
stating that it would provide more precise supervision of credit
unions. One trade association stated that the change will add clarity
and transparency. That commenter also stated that this change
recognizes that there is a difference between market sensitivity and
liquidity risk, so separating the two components makes sense even if
they are interrelated. Additionally, several commenters stated that the
proposed change would enhance consistency with other financial
institution rating systems, specifically for FDIC-insured financial
institutions. These commenters stated the change would enhance
consistency with several state credit union regulators who already
include the ``S'' in their rating systems. They also said the change
will allow examiners to better communicate specific concerns to credit
unions.
A few commenters stated that the proposal added burden without any
corresponding benefit and thus is unwarranted and unnecessary. One
commenter believed that the amendment is not necessary because other
components of CAMEL, including Capital, Asset Quality, and Liquidity,
already evaluate market risk. This commenter stated that the proposal
adds significant burden on both credit unions and examiners and is not
necessary or valuable.
A. Comments Regarding Adopting the ``S'' Component
One commenter requested that the NCUA release details about the
agency's expectations of credit unions meeting any new standards for
the ``S'' component and what this change will mean for the examination
process.
The NCUA will issue an updated Letter to Credit Unions that
explains the criteria and standards for the ``S'' component and how
this change will be incorporated into the examination process.
Additionally, the NCUA Examiner's Guide will integrate the extensive
discussion and tables set forth in the proposal that detailed the
Board's expectations.
With respect to the ``S'' component, the proposal noted that
sensitivity to market risk reflects the exposure of a credit union's
current and prospective earnings level and economic capital position
arising from changes in market prices and interest rates. The Board
noted that effective risk management programs include comprehensive IRR
policies, appropriate and identifiable risk limits, clearly defined
risk mitigation strategies, and a suitable governance framework. The
Board further notes that Sensitivity to Market Risk ratings will be
based on the proposed ``S'' component evaluation content and rating
criteria.
One commenter recommended that the ``S'' component should be
examined by looking at asset liability modeling and engagement levels
of the asset and liability management, loans, deposits, and investment
committees. This commenter also stated that it would be beneficial to
review the change in Net Economic Value of equity.
The Board agrees that these factors should be considered in
evaluating the ``S'' component and notes that examiners will continue
to review them in their evaluation of IRR. The NCUA's LCU 16-CU-08,
Revised Interest Rate Risk Supervision, and the related guidance that
the NCUA implemented in 2017, was designed with the prospect of adding
the ``S'' component and expressly details how the NCUA assesses IRR.
One commenter requested that the Board specifically include a
definition of ``market risk'' as it relates to various sensitivity
factors. That commenter stated that the term ``market risk'' is used
quite frequently in the descriptions of the proposed factors, but the
term ``market risk'' is not clearly defined in the proposal.
After reviewing the NCUA's Supervisory Guidance, Examiner's Guide,
and regulations, the Board has determined that it is unnecessary to
include a definition of ``market risk'' in the Code of Federal
Regulations (CFR). Additionally, no discrete part of the NCUA's
regulations addresses market risk in a dedicated section. Further, the
proposal's sensitivity to market risk evaluation criteria clearly
states that market risk represents the exposure of a credit union's
current and prospective earnings and economic capital arising from
changes in market prices and of interest rates. Additionally, the
description of market risk is highly consistent with how other
prudential regulators, such as the FDIC, Federal Reserve Board, and the
OCC define market risk in their instructions to examiners.\18\
Therefore, the Board has determined the definition of market risk can
effectively be addressed in an Letter to Credit Unions that will
explain the CAMELS rating system and replace the existing letter.\19\
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\18\ https://www.fdic.gov/regulations/safety/manual/section7-1.pdf (Section 7.1) (July 2018) https://occ.gov/publications-and-resources/publications/comptrollers-handbook/files/bank-supervision-process/pub-ch-bank-supervision-process.pdf (June 2018).
\19\ NCUA LCU 07-CU-12 (December 2007).
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A commenter sought clarity to better understand the methodology
underlying the direct assessment of IRR. That commenter stated that the
thresholds for assessment are a key aspect to maintaining a sound
interest rate hedging strategy and managing interest rate sensitivity.
The commenter asked if the NCUA will be able to provide context for
differentiating a rise in interest rates from an ``adverse'' rise in
interest rates, or from a ``materially adverse'' IRR exposure.
The NCUA has previously provided this type of guidance about the
methodology underlying the direct assessment of IRR in its LCU 16-CU-
08, Revised Interest Rate Risk Supervision, which details how NCUA
examiners assess IRR. Credit unions are encouraged to review this
guidance.
The Board has determined that updating the NCUA's supervisory
rating system from CAMEL to CAMELS by adding the ``S'' (Sensitivity to
Market Risk) component to the existing CAMEL rating system as proposed
and listed in the following table is appropriate and consistent with
the NCUA's overall mission to ensure the safety and soundness of
FICUs.\20\
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\20\ 12 CFR 741.3(b)(5).
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``S'' Component for Sensitivity to Market Risk
The sensitivity to market risk reflects the exposure of a credit
union's current and prospective earnings and economic
[[Page 59285]]
capital arising from changes in market prices and interest rates.
Effective risk management programs include comprehensive interest rate
risk policies, appropriate and identifiable risk limits, clearly
defined risk mitigation strategies, and a suitable governance
framework.\21\
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\21\ https://publishedguides.ncua.gov/examiner/Pages/default.htm#ExaminersGuide/IRR/_IRR_Overview.htm%3FTocPath%3DInterest%2520Rate%2520Risk%7C__0.
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Sensitivity to Market Risk ratings are based on, but not limited
to, the following evaluation factors:
Sensitivity of a credit union's current and future
earnings and economic value of capital to adverse changes in market
prices and interest rates;
Management's ability to identify, measure, monitor, and
control exposure to market risk considering a credit union's size,
complexity, and risk profile; and
The nature and complexity of interest rate risk exposure.
The Board has determined that updating the NCUA's supervisory
rating system from CAMEL to CAMELS by adding the ``S'' component to the
existing CAMEL rating system to evaluate sensitivity to market risk and
adding rating criteria as outlined in the proposed rule, along with the
added evaluation factor examples, is appropriate and consistent with
the NCUA's overall mission to ensure the safety and soundness of
FICUs.\22\ The Board notes that the updated rating system is based on,
and is consistent with, the UFIRS system utilized by the other
prudential regulators. Nevertheless, the Board made certain minor, non-
substantive modifications to the rating descriptions to clarify and
better reflect supervision of credit unions. Notwithstanding this
slight divergence from UFIRs, the Board has determined that the NCUA's
revised rating system is consistent with the other financial
supervisors.
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\22\ 12 CFR 741.12.
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Examiners will rate a credit union's ``S'' CAMELS rating component
on a scale of ``1'' to ``5''.
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``S'' rating Description
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1........................ Risk management practices and
controls for market risk are strong for the
size and sophistication of the credit union,
and the level of market risk it has
accepted.
There is minimal potential for
market price or interest rate changes to
create a material adverse effect on the
credit union's earnings performance or
capital position.
The credit union has more than
sufficient earnings and capital to support
the level of market risk taken by the credit
union.
2........................ Risk management practices and
controls for market risk are satisfactory
for the size and sophistication of the
credit union, and the level of market risk
it has accepted.
There is only moderate potential for
market price or interest rate changes to
create a material adverse effect on the
credit union's earnings performance or
capital position.
The credit union has sufficient
earnings and capital to support the level of
market risk taken by the credit union.
3........................ Risk management practices and
controls for market risk are not fully
commensurate with the size and
sophistication of the credit union, or the
level of market risk it has accepted.
There is high potential for market
price or interest rate changes to create a
material adverse effect on the credit
union's earnings performance or capital
position.
The level of market risk taken is
high in relation to the credit union's
earnings or capital.
4........................ Risk management practices and
controls for market risk are significantly
deficient given the size and sophistication
of the credit union, or the level of market
risk it has accepted.
There is high potential for market
price or interest rate changes to threaten
the viability of the credit union.
The level of market risk taken is
excessive in relation to the credit union's
earnings or capital.
5........................ The level of market risk taken or
exposure to market price or interest rate
changes is an imminent threat to the credit
union's viability.
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B. Comments Regarding Modifying the ``L'' Component
One commenter stated that liquidity should be evaluated with
respect to how a credit union maintains access to non-member funds and
tracking member balances as well as cash flow projections and stress
testing.
The NCUA agrees that a liquidity review should include these items.
The Board notes that the proposal's liquidity evaluation content is
comprehensive and addresses liquidity sources as well as liquidity
measurements under various scenarios. However, the Board is adding
examples of liquidity evaluation factors to the evaluation content to
enhance the clarity of its expectations and consistency with UFIRS.
The Board has determined that updating the NCUA's supervisory
rating system from CAMEL to CAMELS by modifying the ``L'' (Liquidity
Risk) component in the existing CAMEL rating system to include only
liquidity evaluation content and rating criteria as outlined in the
proposed rule, along with the added evaluation factor examples, is
appropriate and consistent with the NCUA's overall mission to ensure
the safety and soundness of FICUs.\23\ The following discussion and
table address the liquidity evaluation content and rating criteria.
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\23\ 12 CFR 741.12.
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``L'' Component for Liquidity Risk
In evaluating the adequacy of a credit union's liquidity profile,
examiners consider the current and prospective sources of liquidity
compared to funding needs and the adequacy of liquidity risk management
relative to a credit union's size, complexity, and risk profile. A
credit union's liquidity risk management practices should ensure the
credit union maintains sufficient liquidity to timely meet its
financial obligations and member share and loan demands. These
practices should reflect the credit union's ability to manage unplanned
changes in funding sources, respond to changes in market conditions
affecting its ability to quickly liquidate assets with minimal loss,
ensure liquidity is maintained at a reasonable cost, and limit reliance
on funding sources that may not be available in times of financial
stress or adverse changes in market conditions.\24\
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\24\ https://publishedguides.ncua.gov/examiner/Pages/default.htm#ExaminersGuide/Liquidity/Liquidity.htm%3FTocPath%3DLiquidity%7C__0.
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A credit union's liquidity risk management practices should also be
commensurate with the complexity of the balance sheet and its capital
adequacy. This includes evaluating the reporting mechanisms in place to
monitor and control risk, management's
[[Page 59286]]
response when risk exposure approaches or exceeds the credit union's
risk limits, and the prescribed corrective action taken when
necessary.\25\
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\25\ https://www.ncua.gov/files/letters-credit-unions/LCU2013-10-InteragencyPolicyStatementFunding.pdf.
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Liquidity ratings are based on, but not limited to, the following
evaluation factors:
The adequacy of liquidity sources compared to present and
future needs and the ability of the credit union to meet liquidity
needs without adversely affecting its operations or condition;
The availability of assets readily convertible to cash
without undue loss;
Access to sources of funding;
The level of diversification of funding sources, both on-
and off-balance sheet;
The degree of reliance on short-term, volatile sources of
funds to fund longer term assets;
The trend and stability of deposits; and
The capability of management to properly identify,
measure, monitor, and control the credit union's liquidity position,
including the effectiveness of funds management strategies, liquidity
policies, management information systems, and contingency funding
plans.
The Board has determined that updating the NCUA's supervisory
rating system from CAMEL to CAMELS by modifying the ``L'' (Liquidity
Risk) component in the existing CAMEL rating system to include only
liquidity evaluation content and rating criteria as outlined in the
proposed rule, along with the added evaluation factor examples, is
appropriate and consistent with the NCUA's overall mission to ensure
the safety and soundness of FICUs.\26\ The Board notes that the updated
rating system is based on, and is consistent with, the UFIRS system
utilized by the other prudential regulators. Nevertheless, the Board
made certain minor, non-substantive modifications to the rating
descriptions to clarify and better reflect supervision of credit
unions. Notwithstanding this slight divergence from UFIRs, the Board
has determined that the NCUA's revised rating system is consistent with
the other financial supervisors.
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\26\ 12 CFR 741.12.
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Examiners will rate a credit union's ``L'' CAMELS component rating
on a scale of ``1'' to ``5''.
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``L'' rating Description
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1........................ The credit union has strong
liquidity levels.
The credit union has well-developed
funds management policies and practices.
The credit union has reliable access
to sufficient sources of funds on favorable
terms to meet present and anticipated
liquidity needs.
2........................ The credit union has satisfactory
liquidity levels.
The credit union has adequate funds
management policies and practices.
The credit union has access to
sufficient sources of funds on acceptable
terms to meet present and anticipated
liquidity needs.
3........................ The credit union has low liquidity
levels.
The credit union's funds management
policies and practices are not fully
commensurate with its size and complexity,
or the liquidity risks it has taken.
The credit union may lack ready
access to funds on reasonable terms.
4........................ The credit union has inadequate
liquidity levels.
The credit union's funds management
policies and practices are inadequate given
its size and complexity, or the liquidity
risks it has taken.
The credit union is likely not able
to obtain sufficient funds on reasonable
terms to meet liquidity needs.
5........................ Liquidity levels are so deficient
there is an imminent threat to the credit
union's viability.
The credit union requires
extraordinary external financial assistance
to meet maturing obligations or other
liquidity needs.
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C. Comments Regarding Technical Amendments in the Code of Federal
Regulations
The Board did not receive comments regarding the proposed technical
amendments to the CFR. The CAMEL rating system is not in a separate
section or part in the NCUA's regulations, but references to CAMEL
appear in several parts in the CFR. NCUA regulations regularly refer to
CAMEL composite ``1'' or ``2'' rated credit unions, which indicate the
ability to safely support additional regulatory flexibility; or CAMEL
composite ``4'' or ``5'' rated credit unions, which warrant increased
regulatory scrutiny. The Board has determined that amending the term
CAMEL to CAMELS in the following sections in the CFR as proposed is
necessary with the decision to adopt the CAMELS rating system for both
natural persons and corporate FICUs.
Sec. 700.2 definition of Troubled condition
Sec. 701.14 Change in official or senior executive officer in
credit unions that are newly chartered or are in troubled condition
Sec. 701.23 Purchase, sale, and pledge of eligible
obligations
Sec. 703.13 Permissible investment activities
Sec. 703.14 Permissible investments
Sec. 703.108 Eligibility
Sec. 704.4 Prompt corrective action [for corporate credit
unions]
Sec. 713.6 Fidelity Bond and Insurance Coverage for FICUs
D. Other Comments
Several commenters supported the proposal, stating it would enhance
uniformity with other regulators. One commenter requested that the NCUA
should adopt the UFIRS, which was approved by the FFIEC and used by the
OCC, FDIC, the Federal Reserve Board, and many State Supervisory
Authorities. The same commenter further suggested that the Board should
keep its rating descriptions consistent with the rating descriptions
for the ``L'' and ``S'' ratings used by other banking agencies by
adopting the UFIRS in its entirety, stating the agency would benefit
from not having to establish and maintain a separate authoritative
framework for its examination rating system. The commenter stated that
using the same CAMELS terminology but with different definitions from
the UFIRS would create unnecessary confusion, impair a common
understanding of the condition of financial institutions, create a
disconnect with FFIEC guidance, and
[[Page 59287]]
impose additional regulatory costs and burdens on credit unions.
The NCUA initially modeled its CAMEL rating system framework in
1987 after the FFIEC's UFIRS, or CAMEL framework. Subsequently, FFIEC
updated the CAMEL system to CAMELS in 1996. The NCUA continued to model
subsequent amendments to its CAMEL system after the FFIEC's CAMELS
framework. The Board's decision to add the ``S'' component and thus
adopt the CAMELS rating system further enhances the consistency of the
NCUA's rating system with the UFIRS system. The Board notes that the
risk rating criteria for the ``S'' and ``L'' components are consistent
with UFIRS. In addition, all other composite and component evaluation
content and rating criteria are highly consistent with the FFIEC's
CAMELS rating system. Consequently, the Board has determined that it is
not necessary or beneficial to adopt UFIRS in its entirety.
Another commenter requested that the NCUA address the consistency
of the examination process, stating that it has varied over the years
from examiner to examiner. The commenter noted that the added criteria,
which the commenter referred to as bifurcating components, could create
more inconsistencies.
The NCUA has a framework in place that supports the uniform
application of CAMEL. It includes annual supervisory priorities and
examination scope updates, routine updates to the Examiner's Guide and
National Supervisory Policy Manual, a standardized examination platform
and training program, regional and national quality assurance and
control programs, and periodic training that address the inter-
relationships between and among risk categories and the CAMEL rating
implications. As with all examination systems across financial
regulators, there is the need for examiner judgment to assess a
particular situation; however, the Board believes that the agency has
established processes that will support uniformity in the application
of the CAMELS rating system.
Several commenters expressed concern that the proposal would
require changes to some credit union processes and procedures. One
commenter was especially concerned that recent accounting changes to
Current Expected Credit Losses may make the changes related to CAMELS
more problematic, given the increased volatility in income statements.
Another commenter expressed concern that changing the rating system
will disrupt the examination process for credit unions, especially
smaller credit unions. The commenter stated that even though this
change will not likely be a problem for larger credit unions that
already maintain separate policies to address these risks, it may
impact smaller credit unions that do not already maintain separate
policies. Such credit unions may be required to create new policies and
train staff on procedures to monitor them to comply with the proposed
rule. The commenter continued that smaller credit unions may not have
reached the level of sophistication that is required by this change,
thus creating a challenge for them.
The Board believes that the changes will not result in an
unreasonable burden on credit unions. As the commenters noted,
typically larger credit unions already have processes, procedures, and
systems in place. With respect to smaller credit unions (for example,
those with assets less than $100 million, or 65 percent of credit
unions as of June 2021), the Board believes that the changes will not
impose a burden. Examiners of small credit unions will continue using
the Estimated NEV Tool (ENT) to evaluate IRR.\27\ The ENT results
inform the IRR category rating which in turn, would inform the ``S''
component rating. With the exception of the examination report
separately disclosing the liquidity risk in the ``L'' component and
sensitivity to market risk in the ``S'' component, the Board believes
that small credit unions will experience minimal, if any, changes in
examination procedures. Moreover, the change is an enhancement to the
NCUA's supervision. Credit unions do not need to do anything more than
they are already doing to comply with the policy requirements of the
IRR Rule (Sec. 741.3(b)(5)).
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\27\ NCUA LCU 16-CU-08 (October 2016).
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One commenter stated that it is appropriate to implement the change
in the first quarter of 2022 to allow credit unions to modify their
systems. Several other commenters requested more lead time. One
commenter suggested that the NCUA offer a transitional year in 2022,
specifically performing examinations with the bifurcation but waiting
to officially apply the ``S'' to the CAMEL rating until 2023. The
commenter believed this delay would afford the NCUA time to complete
the implementation of its new MERIT system and prepare clear internal
guidance for examiners to follow along with clear guidance to the
credit unions. Several other commenters recommended that the new rating
system not be effective until at least six months after publication in
the Federal Register noting the additional time would allow credit
unions to adjust their reporting systems.
Credit unions and other stakeholders are aware that the Board has
been working toward the new CAMELS system. Specifically, the NCUA's
Office of Inspector General issued a report recommending this change in
2015 and issued a number of updates between 2016 and 2021 regarding the
agency's CAMELS implementation status.\28\ Accordingly, the Board has
determined that its plans to have the CAMELS system take effect on
April 1, 2022, as proposed, is appropriate.
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\28\ Review of NCUA's Interest Rate Risk Program, Report #OIG-
15-11, NCUA Office of Inspector Gen, (Nov. 13, 2015), available at
https://www.ncua.gov/files/oig/NCUA_Semiannual_Report_Congress_March_2016.pdf.
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One commenter stated that the NCUA should give credit unions the
opportunity to comment should the NCUA decide to modify the rating
descriptions used by the banking agencies.
The Board does not anticipate any modifications of the rating
descriptions used by the other financial regulators. Nevertheless, the
Board notes that any substantive change to the CAMELS rating system--
either through recommendations by the FFIEC or at the Board's
initiative--would generally be made through public notice and comment
under the Administrative Procedure Act.
One commenter provided a comment, beyond the scope of the proposal,
that suggested the NCUA should establish and publish an examination
policy stating that if a credit union's operations have not changed
from previous years, yet the same circumstances are leading to a new
finding or a downgrade of a credit union's composite rating under the
new system, an automatic review will be triggered. Similarly, another
commenter requested that the Board create a process to allow a credit
union to appeal a component and composite CAMELS rating.
The Board notes these comments are beyond the scope of the proposal
and thus it would be inappropriate to make these changes in this
rulemaking. The Board believes that it is more appropriate to address
these issues in the supervisory process on a case-by-case basis.
Further, credit unions currently may appeal composite CAMEL ratings of
``3,'' ``4,'' or ``5,'' and component ratings that have a significant
adverse effect on the nature or level of supervisory oversight.\29\
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\29\ 12 CFR 746.103.
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[[Page 59288]]
IV. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities.\30\ For purposes of
this analysis, the NCUA considers small credit unions to be those
having under $100 million in assets.\31\ The agency has determined that
this rule will not significantly affect credit unions regardless of
asset size because it is not adding any substantive requirement.
Accordingly, the associated cost is minimal. The NCUA certifies the
rule will not have a significant economic impact on a substantial
number of small credit unions.
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\30\ 5 U.S.C. 603(a).
\31\ Interpretive Ruling and Policy Statement 03-2, 68 FR 31949
(May 29, 2003) as amended by Interpretive Ruling and Policy
Statement 13-1, 78 FR 4032 (Jan. 18, 2013).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 applies to rulemakings in which
an agency by rule creates a new paperwork burden on regulated entities
or modifies an existing burden.\32\ For purposes of the Paperwork
Reduction Act of 1995, a paperwork burden may take the form of either a
reporting or a recordkeeping requirement, both referred to as
information collections. This rule imposes no new paperwork-related
requirements. Therefore, this rule will not create new paperwork
burdens or modify any existing paperwork burdens.
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\32\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order. This rule will not have
a substantial direct effect on the states, on the connection between
the National Government and the states, or on the distribution of power
and responsibilities among the various levels of government. The NCUA
has determined this rule does not constitute a policy that has
federalism implications for purposes of the executive order.
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General
Government Appropriations Act, 1999.\33\
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\33\ Public Law 105-277, 112 Stat. 2681 (1998).
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E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) generally provides for congressional review of agency
rules.\34\ A reporting requirement is triggered in instances where the
NCUA issues a final rule as defined by Sec. 551 of the Administrative
Procedure Act. An agency rule, in addition to being subject to
congressional oversight, may also be subject to a delayed effective
date if the rule is a ``major rule.'' The NCUA does not believe this
rule is a ``major rule'' within the meaning of the relevant sections of
SBREFA. As required by SBREFA, the NCUA will submit this final rule to
OMB for it to determine if the final rule is a ``major rule'' for
purposes of SBREFA. The NCUA also will file appropriate reports with
Congress and the Government Accountability Office so this rule may be
reviewed.
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\34\ 5 U.S.C. 551.
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List of Subjects
12 CFR part 700
Credit unions.
12 CFR part 701
Credit unions. Insurance. Reporting and recordkeeping requirements.
12 CFR part 703
Credit unions. Investments. Reporting and recordkeeping
requirements.
12 CFR part 704
Corporate Credit Unions, Prompt Corrective Action
12 CFR part 713
Bonds. Credit unions. Insurance.
By the National Credit Union Administration Board on October 21,
2021
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the Board amends 12 CFR
parts 700, 701, 703, 704, and 713 as follows:
PART 700--DEFINITIONS
0
1. The authority citation for part 700 continues to read as follows:
Authority: 12 U.S.C. 1752, 1757(6), 1766.
Sec. 700.2 [Amended]
0
2. In Sec. 700.2, amend the definition of ``troubled condition'' by
removing the word ``CAMEL'' and adding in its place the word
``CAMELS'', wherever it appears.
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
3. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1788, 1789.
Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31
is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and
3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
Sec. 701.14 [Amended]
0
4. Amend Sec. 701.14, in paragraphs (b)(3)(i) and (ii) and (b)(4)(i)
and (ii), by removing the word ``CAMEL'' and adding in its place the
word ``CAMELS''.
Sec. 701.23 [Amended]
0
5. Amend Sec. 701.23, in paragraph (b)(2) introductory text, by
removing the word ``CAMEL'' and adding in its place the word
``CAMELS.''
PART 703--INVESTMENT AND DEPOSIT ACTIVITIES
0
6. The authority citation for part 703 continues to read as follows:
Authority: 12 U.S.C. 1757(7), 1757(8), and 1757(15).
Sec. 703.13 [Amended]
0
7. Amend Sec. 703.13, in paragraph (d)(3)(iii), by removing the word
``CAMEL'' and adding in its place the word ``CAMELS''.
Sec. 703.14 [Amended]
0
8. Amend Sec. 703.14, in paragraphs (i) and (j)(4), by removing the
word ``CAMEL'' and adding in its place the word ``CAMELS'', and in
paragraph (j)(4) by removing the word ``subparagraph'' and adding
``paragraph (j)(4)'' in its place.
PART 704--CORPORATE CREDIT UNIONS
0
9. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1781, 1789.
Sec. 704.4 [Amended]
0
10. Amend Sec. 704.4, in paragraph (d)(3)(ii), by removing the word
``CAMEL'' and adding in its place the word ``CAMELS''.
[[Page 59289]]
PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERALLY
INSURED CREDIT UNIONS
0
11. The authority citation for part 713 continues to read as follows:
Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h),
1789(a)(11).
Sec. 713.6 [Amended]
0
12. Amend Sec. 713.6, wherever it appears in the table in paragraph
(a)(1) and paragraph (c), by removing the word ``CAMEL'' and adding in
its place the word ``CAMELS''.
[FR Doc. 2021-23332 Filed 10-26-21; 8:45 am]
BILLING CODE 7535-01-P
