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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations 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 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
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 NCUAs revised rating system is consistent with the other financial supervisors.
Examiners will rate a credit unions 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 unions 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 unions 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 unions earnings performance or capital position.
The level of market risk taken is high in relation to the credit unions 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 unions 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 unions viability.

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5

B. Comments Regarding Modifying the L Component
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to market risk considering a credit unions size, complexity, and risk profile; and The nature and complexity of interest rate risk exposure.
The Board has determined that updating the NCUAs 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 NCUAs 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 proposals 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 NCUAs supervisory rating system from CAMEL to CAMELS by 21 https publishedguides.ncua.gov/examiner/
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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 NCUAs 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 unions 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 unions size, complexity, and risk profile. A credit unions liquidity risk 22 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 unions 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 unions 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, managements 24 https publishedguides.ncua.gov/examiner/
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