NCUA Board Member Todd M. Harper Statement on the Proposed Rule on a CAMELS Rating System

As Prepared For Delivery on January 14, 2021

Thank you, Mr. Chairman. And, thank you, Tom, Viki and Marvin, for your informative briefing today on this proposed rule to add a market sensitivity risk component to the CAMEL rating system. This rulemaking has been a very long time in coming.

Nearly a quarter century ago in 1997, about the time I began working on financial services policy issues on Capitol Hill, our sister banking agencies added an “S” component to the CAMEL system. Since then, 24 of our state counterparts have moved over to the CAMELS system to more accurately assess the risks of the credit unions they regulate. It is long overdue for the NCUA do the same.

Not only have our fellow federal and state regulators seen the wisdom in assessing liquidity risk separate from interest rate risk, but also the NCUA Inspector General called for the agency to take similar action more than five years ago. In separating out liquidity risk from interest rate risk, we will ensure that the risk assessments for each of these components are clear and that one component can no longer mask the other component, leading to a false sense of security about a credit union’s risk potential. I am pleased we are finally implementing the Inspector General’s recommendation.

Initially, the NCUA opted not to use the “S” component based on the relative lack of complexity in the consolidated balance sheets of credit unions. The world, however, has changed greatly since then. In 1997, just 19 percent of a credit union’s balance sheet was in mortgage-related assets. That figure has more than doubled over the last two decades to 42 percent, a sizable portion of which are in fixed-rate products.

Longer duration mortgage assets typically increase an institution’s sensitivity to changes in interest rates and require a greater focus on liquidity risk management. By adding a market risk sensitivity component to the existing CAMEL rating system and redefining the liquidity risk component to conform to the standards used by other safety-and-soundness regulators, we will better protect consumers, credit unions, the Share Insurance Fund, and taxpayers.

As I mentioned earlier, many of our state partners have already embraced the CAMELS rating system. Back in 2016, in response to an NCUA Board briefing about adopting the CAMELS system, they provided us with an important perspective. In a letter to the agency, the National Association of State Credit Union Supervisors noted that “both regulators and credit unions report positive outcomes with little if any additional regulatory burden” in those states that have adopted the CAMELS system.

NASCUS also observed that earlier, rather than later, adoption of a sensitivity rating is prudent. The organization observed that “it behooves credit unions and their regulators to monitor ‘sensitivity to market risk’ separately from liquidity risk before rates start to rise—not after the fact.” I fully agree.

Time is no longer on our side. The economic fallout of the COVID-19 pandemic has led to historically low mortgage rates and a sizable refinancing wave. Those lucky enough to purchase or own a home are locking into long-term mortgages that they will likely keep for many years to come. However, when interest rates rise again—which they undoubtedly will—credit unions may find themselves in a bind in managing the changing rate environment.

Historically low interest rates could also present future risk problems for the agency. As the 2015 NCUA Inspector General report observed, exposed credit unions without appropriate interest rate risk policies and an effective interest rate risk program pose unacceptable and preventable risks to the Share Insurance Fund.

In short, the NCUA’s adoption of the CAMELS system is good public policy and long overdue. As a result, I wholeheartedly support this sensible proposed rule and look forward to moving expeditiously with its finalization in the months ahead.

Thank you, Mr. Chairman. I have no further comments.