CAMEL Rating System

Periodically, the National Credit Union Administration (“NCUA”) reviews the CAMEL Rating System to respond to continuing economic and regulatory changes in the credit union industry. This revision is particularly timely and prompted, in large part, by our implementation of the risk-focused examination process.

CAMEL Background. The CAMEL Rating System was adopted by NCUA in October 1987. Its purpose is to provide an accurate and consistent assessment of a credit union’s financial condition and operations in the areas of Capital Adequacy, Asset Quality, Management, Earnings, and Asset/Liability Management. It is not intended to be used as a “report card,” but as an internal tool to measure risk and allocate resources for supervision purposes. The last version of the CAMEL Rating System was published in Letter to Credit Unions No. 00-CU-08, dated November 2000.

Significant Changes. This revision to the CAMEL Rating System incorporates the principles of the risk-focused examination program recently implemented. A risk-focused examination is intended to focus an examiners’ time on activities and areas posing the highest risk. It is a forward-looking approach that evaluates a credit union’s current and potential risk. Financial indicators, while useful, often represent lagging indicators of changing risk. The key to effective risk management is effectiveness in a credit union’s overall management. Management impacts all seven risks found in credit union operations – credit, interest rate, liquidity, transaction, compliance, strategic, and reputation. An examiner’s overall assessment of the credit union is based on numerous factors as discussed in greater detail in the enclosure rather than just on the credit union’s current financial condition. Both the composite and management ratings are determined by several selective factors and are not based solely on a numerical average of the other component ratings.

This revision also eliminates the separate list of key and supplemental ratios along with their related formulas. Credit unions and examiners are directed to the “Financial Performance Report” and “User’s Guide for NCUA’S Financial Performance Report” (NCUA 8008) to find calculated ratios and corresponding formulas. This change ensures consistency in the calculation of ratios by providing a single reference.

Examination Guidelines. The CAMEL rating is not automatically determined by matrix ratios alone. The matrix ratios for the capital, asset quality, and earnings components provide minimal guidance for the examiner’s final assessment of the individual component rating. For the risk-focused examination to be effective the examiner must look behind the numbers to determine the significance of supporting ratios, trends, projections, and the interrelationships with the seven risk categories. Likewise, when evaluating the CAMEL components, examiners will consider both the quantitative measurements as well as the qualitative considerations outlined in the Enclosure before a final rating is determined. To ensure objectivity and the uniqueness of individual credit unions during the examination process, examiners do have the discretion to increase or decrease any rating if in their professional judgment a change in rating is justified.

This Letter is effective immediately and it will supercede Letter to Credit Unions No. 00-CU-08.