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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations FOR FURTHER INFORMATION CONTACT:

Thomas Fay, Director of Capital Markets at 703 5181179 or Robert Bruneau, Senior Capital Markets Specialist at 703 9452491, Office of Examination and Insurance; or Marvin Shaw, Senior Staff Attorney, Office of General Counsel, at 703 5186540.
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 unions 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 agencys evaluation of a credit unions financial condition and operations.7 The five components address a credit unions:
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. 17521775.
3 12 U.S.C. 1766a.
4 12 U.S.C. 1789.
5 12 U.S.C. 1766a.
6 NCUA LCU No. 93 September 25, 1987.
7 NCUA LCU 07CU12 December 2007.
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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 NCUAs 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. 105219, 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 00CU08 November 2000
superseded by NCUA LCU 03CU04; NCUA LCU
07CU12 December 2007; NCUA LCU 03CU04
March 2003superseded by NCUA LCU 07CU
12; NCUA LCU 19CU01 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 NCUAs IRR
assessment requirements. The NCUAs 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 NCUAs 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 741.3b5 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 NCUAs 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 19CU01 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 16CU08 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.
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