NCUA Chairman Todd M. Harper Statement on the Final Rule on the CAMELS Rating System

As Prepared for Delivery on October 21, 2021

Thank you, Tom, Rob, and Marvin, for providing the NCUA Board an overview of the final rule to add a market sensitivity risk component to the CAMEL rating system.  Each of you and your teams did a great job working together to finalize the rule the Board will vote on today.  Myra, thank you, as well, for being available to answer questions today.  And, thank you, Board Member Hood for getting this rulemaking rolling at the start of this year.

In my view, the NCUA’s adoption of the CAMELS system is good public policy and long overdue.  Separating the liquidity and market sensitivity components will allow the NCUA to better monitor these risks within the credit union system, better communicate specific concerns to individual credit unions, and better allocate resources.

In January when the Board issued the proposed rule, I also said that this rating system adjustment has been a very long time in coming.  After all, all of the federal banking agencies added a market sensitivity risk component to their CAMEL systems in 1997.  Additionally, 24 of our state partners have already adopted the CAMELS system to assess more accurately the risks of the credit unions they regulate.  Thus, in adopting these revisions today, we are enhancing consistency in the supervision of credit unions and other depository institutions.  And, as I understand, many of our state partners that have not yet adopted CAMELS will follow our lead and modify their rating systems in conjunction with our change. 

The growing complexity of credit union balance sheets underscores the need for this change.  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 credit union system, however, has become more complex during the last 24 years.  In 1997, only 19 percent of a credit union’s balance sheet was in mortgage-related assets.  That figure has more than doubled to 45 percent as of the end of the second quarter of 2021, and a sizable portion of these mortgages 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.  We will also implement a 2015 recommendation of the NCUA’s Inspector General. 

What is more, 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.  Consumers will likely hold onto these low-interest loans for some time.  However, as interest rates rise again, credit unions may find themselves in a bind in managing the changing rate environment.  Separating the liquidity and market sensitivity components will help credit unions to better assess and respond to such challenges.

Before closing, I do have a few questions for staff.  First, at the start of the COVID-19 pandemic, Congress passed the CARES Act.  This law made several important changes to the Central Liquidity Facility, or CLF.  One of the substantive temporary changes allowed all eleven corporate credit unions, as an agent, to buy CLF capital stock for a subset of their member credit unions.  Each corporate credit union determined member credit unions with assets less than $250 million as their subset and purchased capital stock on their behalf, thus making them eligible to apply for a CLF loan. 

The NCUA’s rules and regulations do not require credit unions with less than $250 million to establish a backup federal liquidity source.  However, access to the CLF during times of excessive uncertainty and potential liquidity issues, such as the COVID-19 pandemic, provides credit unions and the credit union system significant liquidity support.  Tom, given that this temporary provision of the CLF is scheduled to expire at the end of 2021, do you anticipate that this will have an impact on the CAMELS liquidity risk rating for credit unions with less than $250 million in total assets?

Thank you, Tom.  I have also heard concerns that this final rule may create difficulties for small, state-chartered credit unions in the states that have not adopted the CAMELS system.  Rob, are there any implications for these institutions?

Thank you.  Additionally, I know that some comment letters expressed concerns about the NCUA varying from the descriptions of the liquidity and market sensitivity risks used by the federal banking agencies.  Rob or Tom, would you put this issue into context?  Are the differences in the definition of these metrics inconsistent with other supervisors?

Thank you for those observations.  Before recognizing others, I have one last comment.  Just as we are today separating the liquidity and market sensitivity components by adopting the CAMELS rating system, I am hopeful that we will eventually pursue a similar action for the management component of the CAMELS rating when examining the largest credit unions. 

Specifically, the NCUA folds its analysis of a credit union’s consumer compliance performance into the management rating component.  In contrast, the federal banking agencies have created a separate consumer compliance scoring system outside of the CAMELS process.  For complex credit unions, the NCUA should pursue a similar path.  This system would better protect consumers and ensure that the system fulfills its statutory mission of meeting the credit and savings needs of consumers.

That concludes my remarks.  I now recognize Vice Chairman Hauptman.