CAMELS Rating System, 59282-59289 [2021-23332]
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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
benefits of such regulations. In addition,
section 302(b) of RCDRIA requires new
regulations and amendments to
regulations that impose additional
reporting, disclosures, or other new
requirements on insured depository
institutions generally to take effect on
the first day of a calendar quarter that
begins on or after the date on which the
regulations are published in final
form.18
The FDIC believes that this final rule
does not impose new reporting,
disclosure, or other requirements, and
likely instead reduces such burdens by
allowing Electing CBOs to avoid
calculating and reporting tier 2 capital,
as would be required under the current
Real Estate Lending Standards.
Therefore, the FDIC believes that it is
not necessary to delay the effective date
beyond the 30-day period provided in
the APA.
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E. Plain Language
Section 722 of the GLBA 19 requires
each Federal banking agency to use
plain language in all of its proposed and
final rules published after January 1,
2000. The FDIC sought to present the
final rule in a simple and
straightforward manner and did not
receive any comments on the use of
plain language in the proposal.
F. Congressional Review Act
For purposes of the Congressional
Review Act, OMB makes a
determination as to whether a final rule
constitutes a ‘‘major’’ rule. If a rule is
deemed a ‘‘major rule’’ by the OMB, the
Congressional Review Act generally
provides that the rule may not take
effect until at least 60 days following its
publication.
The Congressional Review Act defines
a ‘‘major rule’’ as any rule that the
Administrator of the Office of
Information and Regulatory Affairs of
the OMB finds has resulted in or is
likely to result in (1) an annual effect on
the economy of $100,000,000 or more;
(2) a major increase in costs or prices for
consumers, individual industries,
Federal, State, or local government
agencies or geographic regions; or (3)
significant adverse effects on
competition, employment, investment,
productivity, innovation, or on the
ability of United States-based
18 Id.
19 12
at 4802(b).
U.S.C. 4809.
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enterprises to compete with foreignbased enterprises in domestic and
export markets.
The OMB has determined that the
final rule is not a major rule for
purposes of the Congressional Review
Act, and the FDIC will submit the final
rule and other appropriate reports to
Congress and the Government
Accountability Office for review.
List of Subjects in 12 CFR Part 365
Banks, Banking, Mortgages, Savings
associations.
Authority and Issuance
For the reasons stated in the
preamble, the Federal Deposit Insurance
Corporation amends part 365 of chapter
III of title 12 of the Code of Federal
Regulations as follows:
PART 365—REAL ESTATE LENDING
STANDARDS
1. The authority citation for part 365
continues to read as follows:
■
Authority: 12 U.S.C. 1828(o) and 5101 et
seq.
2. Amend appendix A to subpart A by
revising the section titled ‘‘Loans in
Excess of the Supervisory Loan-to-Value
Limits’’ to read as follows:
■
Appendix A to Subpart A of Part 365—
Interagency Guidelines for Real Estate
Lending Policies
*
*
*
*
4 For the purposes of these Guidelines, for state
non-member banks and state savings associations,
‘‘total capital’’ refers to the FDIC-supervised
institution’s tier 1 capital, as defined in § 324.2 of
this chapter, plus the allowance for loan and leases
losses or the allowance for credit losses attributable
to loans and leases, as applicable. The allowance for
credit losses attributable to loans and leases is
applicable for institutions that have adopted the
Current Expected Credit Losses methodology.
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*
*
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Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on October 21,
2021.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2021–23381 Filed 10–26–21; 8:45 am]
BILLING CODE 6714–01–P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 700, 701, 703, 704, and
713
RIN 3133–AF32
CAMELS Rating System
*
Loans in Excess of the Supervisory Loan-toValue Limits
The agencies recognize that appropriate
loan-to-value limits vary not only among
categories of real estate loans but also among
individual loans. Therefore, it may be
appropriate in individual cases to originate
or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value
limits, based on the support provided by
other credit factors. Such loans should be
identified in the institution’s records, and
their aggregate amount reported at least
quarterly to the institution’s board of
directors. (See additional reporting
requirements described under ‘‘Exceptions to
the General Policy.’’)
The aggregate amount of all loans in excess
of the supervisory loan-to-value limits should
not exceed 100 percent of total capital.4
Moreover, within the aggregate limit, total
loans for all commercial, agricultural,
multifamily or other non-1-to-4 family
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residential properties should not exceed 30
percent of total capital. An institution will
come under increased supervisory scrutiny
as the total of such loans approaches these
levels.
In determining the aggregate amount of
such loans, institutions should: (a) Include
all loans secured by the same property if any
one of those loans exceeds the supervisory
loan-to-value limits; and (b) include the
recourse obligation of any such loan sold
with recourse. Conversely, a loan should no
longer be reported to the directors as part of
aggregate totals when reduction in principal
or senior liens, or additional contribution of
collateral or equity (e.g., improvements to the
real property securing the loan), bring the
loan-to-value ratio into compliance with
supervisory limits.
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
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.
SUMMARY:
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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
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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
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:
• Capital adequacy;
• Asset quality;
• Management;
• Earnings; and
• Liquidity and asset liability
management.
Examiners assign composite and
component CAMEL ratings using a scale
1 12
U.S.C. 1751 et. seq.
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).
6 NCUA LCU No. 93 (September 25, 1987).
7 NCUA LCU 07–CU–12 (December 2007).
2 12
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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.
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 riskfocused exam approach.10 11
As balance sheets of natural person
credit unions have become larger and
more complex, the NCUA has
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).
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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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
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
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
In January 2017, the NCUA also
implemented its revised IRR
supervision program incorporating the
regulatory requirements from
§ 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
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
In support of the proposal, the Board
explained that changes in the size and
complexity of FICUs warranted the
12 See,
e.g., NCUA LCU 19–CU–01 (January 2019).
FR 5155 (Feb. 2, 2012). See 12 CFR 741.3,
12 CFR 741, app. A.
14 86 FR 28241 (May 26, 2021).
15 NCUA LCU 16–CU–08 (October 2016).
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.
13 77
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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.
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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.
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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
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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
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
‘‘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
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/banksupervision-process/pub-ch-bank-supervisionprocess.pdf (June 2018).
19 NCUA LCU 07–CU–12 (December 2007).
20 12 CFR 741.3(b)(5).
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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
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
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.
Examiners will rate a credit union’s
‘‘S’’ CAMELS rating component on a
scale of ‘‘1’’ to ‘‘5’’.
‘‘S’’ rating
Description
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.
• 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.
• 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.
• 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.
• 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.
2 ........................
3 ........................
4 ........................
5 ........................
B. Comments Regarding Modifying the
‘‘L’’ Component
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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
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One commenter stated that liquidity
should be evaluated with respect to how
a credit union maintains access to nonmember 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
21 https://publishedguides.ncua.gov/examiner/
Pages/default.htm#ExaminersGuide/IRR/_IRR_
Overview.htm%3FTocPath%3DInterest%2520
Rate%2520Risk%7Cll0.
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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.
‘‘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
22 12
23 12
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CFR 741.12.
CFR 741.12.
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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
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
24 https://publishedguides.ncua.gov/examiner/
Pages/default.htm#ExaminersGuide/Liquidity/
Liquidity.htm%3FTocPath%3DLiquidity%7Cll0.
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response when risk exposure
approaches or exceeds the credit
union’s risk limits, and the prescribed
corrective action taken when
necessary.25
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 offbalance sheet;
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.
Examiners will rate a credit union’s
‘‘L’’ CAMELS component rating on a
scale of ‘‘1’’ to ‘‘5’’.
‘‘L’’ rating
Description
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.
• 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.
• 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.
• 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.
• 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.
2 ........................
3 ........................
4 ........................
5 ........................
C. Comments Regarding Technical
Amendments in the Code of Federal
Regulations
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• The degree of reliance on shortterm, 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
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
25 https://www.ncua.gov/files/letters-creditunions/LCU2013-10-InteragencyPolicyStatement
Funding.pdf.
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CAMELS rating system for both natural
persons and corporate FICUs.
• § 700.2 definition of Troubled
condition
• § 701.14 Change in official or senior
executive officer in credit unions that
are newly chartered or are in troubled
condition
• § 701.23 Purchase, sale, and pledge of
eligible obligations
• § 703.13 Permissible investment
activities
• § 703.14 Permissible investments
• § 703.108 Eligibility
• § 704.4 Prompt corrective action [for
corporate credit unions]
• § 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
26 12
PO 00000
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
CFR 741.12.
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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
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
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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
(§ 741.3(b)(5)).
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
27 NCUA
PO 00000
LCU 16–CU–08 (October 2016).
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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.
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-bycase 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
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.
29 12 CFR 746.103.
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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
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.
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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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
word ‘‘CAMEL’’ and adding in its place
the word ‘‘CAMELS’’, wherever it
appears.
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 § 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.
PART 701—ORGANIZATION AND
OPERATION OF FEDERAL CREDIT
UNIONS
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
1. The authority citation for part 700
continues to read as follows:
■
U.S.C. 603(a).
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).
32 44 U.S.C. 3507(d); 5 CFR part 1320.
31 Interpretive
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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.
§ 701.14
[Amended]
2. In § 700.2, amend the definition of
‘‘troubled condition’’ by removing the
[Amended]
4. Amend § 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’’.
■
§ 701.23
[Amended]
5. Amend § 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
6. The authority citation for part 703
continues to read as follows:
■
Authority: 12 U.S.C. 1757(7), 1757(8), and
1757(15).
§ 703.13
[Amended]
7. Amend § 703.13, in paragraph
(d)(3)(iii), by removing the word
‘‘CAMEL’’ and adding in its place the
word ‘‘CAMELS’’.
■
§ 703.14
[Amended]
8. Amend § 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
9. The authority citation for part 704
continues to read as follows:
■
Authority: 12 U.S.C. 1752, 1757(6), 1766.
§ 700.2
30 5
3. The authority citation for part 701
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1781, 1789.
§ 704.4
[Amended]
■
33 Public
34 5
PO 00000
Law 105–277, 112 Stat. 2681 (1998).
U.S.C. 551.
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10. Amend § 704.4, in paragraph
(d)(3)(ii), by removing the word
‘‘CAMEL’’ and adding in its place the
word ‘‘CAMELS’’.
■
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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
PART 713—FIDELITY BOND AND
INSURANCE COVERAGE FOR
FEDERALLY INSURED CREDIT
UNIONS
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).
§ 713.6
[Amended]
12. Amend § 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
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 712
RIN 3133–AE95
Credit Union Service Organizations
(CUSOs)
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
The NCUA Board (Board) is
issuing a final rule that amends the
NCUA’s credit union service
organization (CUSO) regulation. The
final rule accomplishes two objectives:
expanding the list of permissible
activities and services for CUSOs to
include the origination of any type of
loan that a Federal credit union (FCU)
may originate; and granting the Board
additional flexibility to approve
permissible activities and services.
DATES: This final rule is effective
November 26, 2021.
FOR FURTHER INFORMATION CONTACT:
Frank Kressman, Office of General
Counsel, (703) 518–6540; or by mail at
National Credit Union Administration,
1775 Duke Street, Alexandria, VA
22314.
SUMMARY:
regulations governing both FCUs and
FICUs. Section 120 of the FCU Act is a
general grant of regulatory authority and
authorizes the Board to prescribe
regulations for the administration of the
FCU Act.2 Section 209 of the FCU 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.3
Accordingly, the FCU Act grants the
Board broad rulemaking authority to
ensure that the credit union industry
and the National Credit Union Share
Insurance Fund (NCUSIF) remain safe
and sound.
Under the FCU Act, FCUs have the
authority to lend up to one percent of
their paid-in and unimpaired capital
and surplus, and to invest an equivalent
amount, in CUSOs.4 The NCUA
regulates FCUs’ lending to, and
investment in, CUSOs in part 712 of its
regulations (CUSO rule).5 In general, a
CUSO is an organization: (1) In which
a FICU has an ownership interest or to
which a FICU has extended a loan; (2)
is engaged primarily in providing
products and services to credit unions,
their membership, or the membership of
credit unions contracting with the
CUSO; and (3) whose business relates to
the routine daily operations of the credit
unions it serves.6 The CUSO rule
provides a list of preapproved activities
and services related to the routine daily
operations of credit unions.7
The list of preapproved activities and
services in the CUSO rule has not been
substantively revised since 2008.8 The
2008 final rule added two new
categories of permissible CUSO
activities: (1) Credit card loan
origination and (2) payroll processing
services. The 2008 final rule also added
new examples of permissible CUSO
activities and clarified that FCUs may
invest in, and loan to, CUSOs that buy
and sell participations in loans they are
authorized to originate. In the 2008 final
rule, commenters requested that FCUs
be permitted to lend to or invest in
CUSOs involved in broader types of
SUPPLEMENTARY INFORMATION:
2 12
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I. Introduction
Legal Authority and Background
The Board is issuing this rule
pursuant to its authority under the
Federal Credit Union Act (FCU Act).1
Under the FCU Act, the NCUA is the
chartering and supervisory authority for
FCUs and the federal supervisory
authority for federally insured credit
unions (FICUs). The FCU Act grants the
NCUA a broad mandate to issue
1 12
U.S.C. 1751 et seq.
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U.S.C. 1766(a).
U.S.C. 1789.
4 12 U.S.C. 1757.
5 12 CFR part 712. All sections of part 712 apply
to FCUs. Sections 712.2(d)(2)(ii), 712.3(d), 712.4,
and 712.11(b) and (c) apply to federally insured,
state-chartered credit unions (FISCUs), as provided
in § 741.222 of the chapter. FISCUs must follow the
law in the state in which they are chartered with
respect to the sections in part 712 that only apply
to FCUs. Corporate credit union CUSOs are subject
to part 704. Any amendments to part 704 would
occur through a separate rulemaking and are not
included in this final rule.
6 See 12 CFR 712.1(d), 712.3(b), and 712.5.
7 12 CFR 712.5.
8 73 FR 79307 (Dec. 29, 2008).
3 12
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59289
lending; specifically, car loans,
including direct lending and the
purchase of retail installment sales
contracts from vehicle dealerships, and
payday lending. The NCUA, however,
declined to provide such authority at
that time.9
II. Proposed Rule
At its January 14, 2021 meeting, the
Board issued the proposed rule to
amend the NCUA’s CUSO regulation.10
The proposed rule would accomplish
two objectives: Expanding the list of
permissible activities and services for
CUSOs that FCUs may lend to or invest
in to include origination of any type of
loan that an FCU may originate; and
granting the Board additional flexibility
to approve permissible activities and
services. The NCUA also sought
comment on broadening general FCU
investment authority in CUSOs based
on the FCU Act’s provision that
authorizes FCUs to invest in
organizations providing services
associated with the routine operations
of credit unions, which is codified in a
separate provision from the authority for
FCUs to lend to ‘‘credit union
organizations.’’ The proposed rule
provided for a 30-day comment period
that closed on March 29, 2021. To allow
interested persons more time to
consider and submit comments, the
Board extended the comment period for
an additional 30 days. The extended
comment period closed on April 30,
2021.11
The Board received over 1,000
comments on the proposed rule.
Comments were received from credit
unions, both state and federal, CUSOs,
credit union leagues and trade
associations, banking trade
organizations, individuals, consumer
organizations, and an association of
state credit union supervisors. In
general, consumer organizations,
banking trade organizations, and
individuals who participated in a form
letter writing campaign were opposed to
the proposed rule. Credit unions were
not unanimous, with some credit unions
supporting the rule and others opposing
it. CUSOs, credit union leagues, and
trade organizations were generally in
favor of the proposed rule.
III. Final Rule
The final rule adopts the proposed
rule without any substantive change.
Under the final rule, therefore, CUSOs
are permitted to originate any type of
9 The NCUA’s rationale for not extending CUSO
lending authority more broadly is discussed in
detail in Section III, Final Rule.
10 86 FR 11645 (Feb. 26, 2001).
11 86 FR 16679 (Mar. 31, 2021).
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]]>Agencies
[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]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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''.
------------------------------------------------------------------------
``S'' rating Description
------------------------------------------------------------------------
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.
------------------------------------------------------------------------
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''.
------------------------------------------------------------------------
``L'' rating Description
------------------------------------------------------------------------
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.
------------------------------------------------------------------------
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
