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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
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 proposals 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 agencys 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
Examiners Guide will integrate the extensive discussion and tables set forth in the proposal that detailed the Boards expectations.
With respect to the S component, the proposal noted that 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 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 NCUAs LCU 16CU08, 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 NCUAs Supervisory Guidance, Examiners 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 NCUAs regulations addresses market risk in a dedicated section. Further, the proposals sensitivity to market risk evaluation criteria clearly states that market risk represents the exposure of a credit unions 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 16CU08, 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 NCUAs 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 NCUAs 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 unions 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 07CU12 December 2007.
20 12 CFR 741.3b5.

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