The Department of Insurance and Financial Services will begin using a modified version of NCUA’s CAMEL rating system for state-chartered credit unions, according to a recent letter to Michigan state-chartered credit unions. DIFS’ Office of Credit Unions began using this new system, which includes the “Sensitivity to Market Risk” or “S” component, effective April 10, 2014. The letter was issued to explain the examination process relating to the adoption of the Uniform Financial Institutions Ratings System, which for Michigan credit unions will be known as CAMELS.
Although the NCUA has not implemented the separate rating of the “S” component, which was adopted by the Federal Financial Institutions Examination Council in 1997, the OCU believes it is prudent to utilize this component for Michigan-chartered credit unions. OCU said in its letter that as funding sources and investments become more complex, management of a credit union’s interest rate risk becomes more important and distinct from the liquidity management process. The OCU believes this Sensitivity component specifically “addresses the degree to which interest rate changes can impact a credit union’s earnings or net worth,” in addition to the credit union’s “ability to measure, monitor and manage its interest rate risk exposure.”
"Interest rate risk exposure is something that credit unions and their regulators are keenly aware of and appropriately concerned about," MCUL & Affiliates CEO David Adams said. "While it not surprising that a progressive regulator would want to emphasize this risk category, the MCUL is hopeful that both state and federal regulators apply appropriate balance as they require activities and metrics that demonstrate interest rate risk mitigation."
Included with the letter to credit unions is the CAMELS Rating Determinations portion of the OCU’s Policies and Procedures Manual. There is a summary of the composite rating definitions, and the descriptions and the definitions for the six component ratings.
CAMEL or CAMELS ratings are for industry officials only and are not intended to be used by credit unions for marketing purposes.