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Federal Register / Vol. 86, No. 44 / Tuesday, March 9, 2021 / Proposed Rules incorporating the NCUAs risk-focused exam approach.8
As balance sheets of credit unions have become larger and more complex, the NCUA consistently provided supervision and guidance regarding exposures to market risk to the credit union industry. The NCUA also advised credit unions that IRR was a supervisory priority from 2012 through 2019.
Since 2012, the Board implemented regulations that introduced standards and expectations affecting examiner procedures and the NCUAs IRR
assessment requirements. The NCUAs IRR rule became effective for credit unions in September 2012.9 The rule requires credit unions that have more than $50 million in assets to maintain a written IRR policy and an effective risk management program. The NCUA
also finalized its derivatives rule in April 2014 providing authority for qualified federal credit unions to use financial derivatives to conduct hedging activities to better optimize their interest rate risk management.10
The NCUA also implemented its revised IRR supervision program in January 2017 11 incorporating the regulatory requirements from parts 741
IRR and 703 derivatives, enhancing examiner guidance, improving the consistency of IRR ratings, and to identify outlier credit unions with excessive risk levels.

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II. Rationale for Proposed Rule The NCUAs existing CAMEL rating process addresses both sensitivity to market risk and liquidity risk within the L component.12 While there is an interrelationship between sensitivity to market risk and liquidity risk, there are also differences that support separating the risks into distinct components. The proposed rule would enhance 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.
Adding an S component and modifying the L component will provide greater clarity and transparency NCUA to adopt, by regulation, a system of prompt corrective action PCA consisting of minimum capital standards and corresponding remedies to improve the net worth of federally-insured natural person credit unions.
8 NCUA Letter to Credit Unions 03CU04
March 2003.
9 77 FR 5155 Feb. 2, 2012.
10 79 FR 5228 Jan 31, 2014.
11 Revised Interest Rate Risk Supervision
National Credit Union Administration ncua.gov 16CU08/October 2016.
12 NCUA Letter to Credit Unions 07CU12, CAMEL Rating System. Dec. 2007.

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regarding credit unions sensitivity to market risk and liquidity risk exposures.
The proposed addition would make the NCUAs rating system more consistent with the other financial institution regulators ratings system both at the federal and state levels.13
Separating the S and L
component ratings will allow NCUA to enhance the:
Monitoring of sensitivity to market risk and liquidity risk in the credit union system;
Communication of specific concerns to individual credit unions;
and Allocation of resources.
Evaluating, rating, and disclosing assessments of interest rate and liquidity risks to credit union management is a long-standing examination procedure at the NCUA.
The proposed change to add the S
provides greater transparency into the NCUAs evaluation and conclusions regarding these two risks.
In 2015, the NCUA Office of Inspector General OIG recommended the addition of an S component to better capture a credit unions sensitivity to market risk and improve clarity and transparency in the CAMEL rating system.14 The NCUA OIG also recommended the NCUA revise its L
component rating to reflect only liquidity factors.
Also in 2015, the NCUA initiated a comprehensive restructuring of its supervision activities through the Enterprise Solution Modernization program ESM. The ESM is a multi-year introduction of emerging and secure technology solutions supporting the NCUAs examination, data collection, and reporting efforts to improve key, integrated business processes. The NCUA planned the implementation of the OIGs 2015 CAMELS
recommendations as part of the development of a new examination platform, known as the Modern Examination and Risk Identification Tool, or MERIT. The NCUA anticipates completing the transition from its legacy examination software to MERIT which has been configured to support the S
in CAMELS in 2021. Other revisions to examiner supervision guidance and procedures will also be updated as part of the transition.
In general, the NCUA Board expects that adopting a sixth CAMELS rating 13 The banking regulators Federal Reserve, FDIC, and OCC each include the S component to evaluate sensitivity to market place risk. In addition, 24 state supervisory authorities adopted the S component.
14 OIG1511 Review of NCUAs Interest Rate Risk Program.

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component will not have any adverse effect on a credit unions CAMEL
composite rating. The proposed separation of sensitivity to market risk and liquidity risk into individual CAMELS rating components will reduce potential rating inconsistencies.
Currently, examiners combine the risk evaluation of these related, but separate, risk areas into the L component. The separation into two components provides greater clarity of the assessment of each risk area. The Board anticipates the agency can make this transition smoothly and without significant disruption to the exam process or agency operations as early as the first quarter of 2022.
III. Summary of the Proposed Rule The Board is proposing to add the S
component to the existing CAMEL
rating system and redefine the current L component. Evaluation of these as individual components will enhance the communication and monitoring of credit unions sensitivity to market risk and liquidity risk. The Board is requesting comments on this proposal, such as, but not limited to, the definitions of both the L and S
components and the criteria for each of the specific 15 assigned ratings. For example, the Board may consider modifying the rating descriptions used for the L and S ratings used by the other banking agencies rating system The Uniform Financial Institutions Rating System UFIRS, detailed below in Sections IIA and IIB of this proposal.15
A. S Component for Sensitivity to Market Risk The sensitivity to market risk reflects the exposure of a credit unions current and prospective earnings level and economic capital position arising from changes in market prices and the general level of 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.
Sensitivity to Market Risk ratings are based on, but not limited to, the following evaluation factors:
Sensitivity of a credit unions current and future earnings and economic value of capital to adverse changes in market prices and interest rates;
Managements ability to identify, measure, monitor, and control exposure 15 https www.fdic.gov/regulations/laws/rules/
5000-900.html.

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