[Federal Register Volume 86, Number 205 (Wednesday, October 27, 2021)]
[Rules and Regulations]
[Pages 59282-59289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23332]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 703, 704, and 713

RIN 3133-AF32


CAMELS Rating System

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (the Board) is updating the NCUA's supervisory 
rating system from CAMEL to CAMELS by adding the ``S'' (Sensitivity to 
Market Risk) component to the existing CAMEL rating system and 
redefining the ``L'' (Liquidity Risk) component. The benefits of adding 
the ``S'' component are to enhance transparency and allow the NCUA and 
federally insured natural person and corporate credit unions to better 
distinguish between liquidity risk (``L'') and sensitivity to market 
risk (``S''). The addition of ``S'' also enhances consistency between 
the supervision of credit unions and financial institutions supervised 
by the other banking agencies. The effective date of the rule will be 
April 1, 2022. The Board plans to implement the addition of the ``S'' 
rating component and a redefined ``L'' rating for examinations and 
contacts started on or after April 1, 2022.

DATES: The rule becomes effective April 1, 2022.

[[Page 59283]]


FOR FURTHER INFORMATION CONTACT: Thomas Fay, Director of Capital 
Markets at (703) 518-1179 or Robert Bruneau, Senior Capital Markets 
Specialist at (703) 945-2491, Office of Examination and Insurance; or 
Marvin Shaw, Senior Staff Attorney, Office of General Counsel, at (703) 
518-6540.

SUPPLEMENTARY INFORMATION:

I. Legal Authority and Background

    The Board is issuing this final rule pursuant to its authority 
under the Federal Credit Union Act (the Act).\1\ Under the Act, the 
NCUA is the chartering and supervisory authority for federal credit 
unions (FCUs) and the federal supervisory authority for federally 
insured credit unions (FICUs).\2\ The Act grants the NCUA a broad 
mandate to issue regulations governing both FCUs and FICUs. Section 120 
of the Act is a general grant of regulatory authority and authorizes 
the Board to prescribe regulations for the administration of the 
Act.\3\ Section 209 of the Act is a plenary grant of regulatory 
authority to the NCUA to issue regulations necessary or appropriate to 
carry out its role as share insurer for all FICUs.\4\ The Act also 
includes an express grant of authority for the Board to subject 
federally chartered central, or corporate, credit unions to such rules, 
regulations, and orders as the Board deems appropriate.\5\
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    \1\ 12 U.S.C. 1751 et. seq.
    \2\ 12 U.S.C. 1752-1775.
    \3\ 12 U.S.C. 1766(a).
    \4\ 12 U.S.C. 1789.
    \5\ 12 U.S.C. 1766(a).
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    As part of its supervisory activities, the NCUA adopted the CAMEL 
rating system in 1987.\6\ Through CAMEL ratings, the NCUA sought to 
account for and reflect all significant financial, operational, and 
management factors that examiners assess in their evaluation of a 
credit union's performance and risk profile. Under this system, as 
specified in the 2007 Letter to Credit Unions (LCU), the NCUA assigns 
each credit union a composite CAMEL rating and five component ratings 
based on the agency's evaluation of a credit union's financial 
condition and operations.\7\ The five components address a credit 
union's:
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    \6\ NCUA LCU No. 93 (September 25, 1987).
    \7\ NCUA LCU 07-CU-12 (December 2007).
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     Capital adequacy;
     Asset quality;
     Management;
     Earnings; and
     Liquidity and asset liability management.
    Examiners assign composite and component CAMEL ratings using a 
scale that ranges from ``1'' to ``5.'' The highest rating is a ``1,'' 
indicating the strongest performance and risk management practices, and 
the least degree of supervisory concern. The lowest rating is a ``5,'' 
indicating the weakest performance, inadequate risk management 
practices, and the highest degree of supervisory concern. Examiners 
rate these components based upon qualitative and quantitative factors 
using their professional judgement.
    In 1997, members of the Federal Financial Institutions Examination 
Council (FFIEC), with the exception of the NCUA, proposed and 
subsequently adopted revisions to the Uniform Financial Institutions 
Rating System (UFIRS).\8\ The FFIEC released a Policy Statement at that 
time to reaffirm the five CAMEL rating system components and added a 
sixth component, Sensitivity to Market Risk (``S''), to address price 
and interest rate risks (IRR).\9\ The NCUA opted not to use the ``S'' 
component based on the relative lack of complexity in the consolidated 
balance sheets of credit unions at the time. Instead, the NCUA retained 
its existing CAMEL rating system.
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    \8\ At the time, the FFIEC was comprised of the Federal Deposit 
Insurance Corporation (FDIC), the Board of Governors of the Federal 
Reserve (Federal Reserve), and the Office of the Comptroller of the 
Currency (OCC), the NCUA, and the Office of Thrift Supervision, 
which merged into OCC as a result of the Dodd Frank Wall Street 
Reform and Consumer Protection Act. See Section 312 of Public Law 
111-203.
    \9\ 62 FR 752, (Jan. 6, 1997).
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    However, since 1997, credit union balance sheets have grown larger 
and more complex. For example, the credit union industry significantly 
increased the percentage of holdings in mortgage related assets to 
total assets from 19 percent in 1997 to 45 percent in June 2021. 
Accordingly, the NCUA has made several modifications to the CAMEL 
rating system since 1997. These involved changes to financial ratios, 
adding and subsequently eliminating a CAMEL matrix, accommodating the 
adoption of Prompt Corrective Action, and incorporating the NCUA's 
risk-focused exam approach.10 11
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    \10\ In 1998, Congress enacted the Credit Union Membership 
Access Act (Pub. L. 105-219, 112 Stat. 913 (1998)), which amended 
the Act to require the NCUA to adopt, by regulation, a system of 
prompt corrective action consisting of minimum capital standards and 
corresponding remedies to improve the net worth of federally insured 
``natural person'' credit unions.
    \11\ NCUA LCU 00-CU-08 (November 2000)--superseded by NCUA LCU 
03-CU-04; NCUA LCU 07-CU-12 (December 2007); NCUA LCU 03-CU-04 
(March 2003)--superseded by NCUA LCU 07-CU-12; NCUA LCU 19-CU-01 
(January 2019).
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    As balance sheets of natural person credit unions have become 
larger and more complex, the NCUA has consistently provided supervision 
and guidance regarding IRR to the credit union industry. The NCUA also 
advised credit unions that IRR was a supervisory priority from 2012 
through 2019.\12\
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    \12\ See, e.g., NCUA LCU 19-CU-01 (January 2019).
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    In 2012, the Board implemented regulations that introduced 
standards and expectations affecting examiner procedures and the NCUA's 
IRR assessment requirements. The NCUA's IRR rule became effective for 
credit unions in September 2012. The rule requires insured credit 
unions that have more than $50 million in assets to maintain a written 
IRR policy and an effective IRR management program.\13\
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    \13\ 77 FR 5155 (Feb. 2, 2012). See 12 CFR 741.3, 12 CFR 741, 
app. A.
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    In April 2014, the NCUA also finalized its derivatives rule and 
subsequently amended it in May 2021. The amendments modernize the 
NCUA's derivatives rule and make it more principles-based, while 
retaining key safety and soundness components. The changes provide more 
flexibility for qualified FCUs to manage IRR through the use of 
derivatives.\14\
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    \14\ 86 FR 28241 (May 26, 2021).
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    In January 2017, the NCUA also implemented its revised IRR 
supervision program incorporating the regulatory requirements from 
Sec.  741.3(b)(5) (IRR) and subpart B to part 703 (derivatives), 
enhancing examiner guidance, improving the consistency of IRR ratings, 
and identifying outlier credit unions with excessive IRR levels.\15\
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    \15\ NCUA LCU 16-CU-08 (October 2016).
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II. Proposed Rule

    On January 14, 2021, the Board approved issuing a notice proposing 
to amend the existing CAMEL rating system by adding an ``S'' component 
to assess sensitivity to market risk and modify the ``L'' component to 
include only liquidity evaluation content and rating criteria.\16\ The 
Board explained that these changes would provide greater clarity and 
transparency regarding credit unions' sensitivity to market and 
liquidity risk exposures. The Board further explained that the proposed 
changes would make the NCUA's rating system more consistent with the 
other banking agencies' rating systems at the federal and state 
levels.\17\
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    \16\ 86 FR 13494.
    \17\ The banking regulators (Federal Reserve Board, FDIC, and 
OCC) each include the ``S'' component to evaluate sensitivity to 
marketplace risk. In addition, as of January 2021, 24 SSAs have 
adopted the ``S'' component.
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    In support of the proposal, the Board explained that changes in the 
size and complexity of FICUs warranted the

[[Page 59284]]

changes and that increased complexity typically requires greater focus 
on interest rate and liquidity risk profiles.
    The Board noted that separating the ``S'' and ``L'' component 
ratings will allow NCUA to better:
     Monitor sensitivity to market and liquidity risks in the 
credit union system;
     Communicate specific concerns to individual credit unions; 
and
     Allocate resources.

III. Final Rule and Public Comments on the Proposed Rule

    The Board solicited public comments over a 60-day comment period 
and received 16 comments. Commenters included credit union trade 
associations, state credit union leagues, an organization of state 
credit union supervisors, credit unions, and individuals. Most 
commenters supported the proposal. Several expressed concern about the 
proposal's implementation, particularly about the associated compliance 
costs and the need for consistent application across the NCUA regions 
and examiners.
    As noted previously, commenters generally supported the proposal, 
stating that it would provide more precise supervision of credit 
unions. One trade association stated that the change will add clarity 
and transparency. That commenter also stated that this change 
recognizes that there is a difference between market sensitivity and 
liquidity risk, so separating the two components makes sense even if 
they are interrelated. Additionally, several commenters stated that the 
proposed change would enhance consistency with other financial 
institution rating systems, specifically for FDIC-insured financial 
institutions. These commenters stated the change would enhance 
consistency with several state credit union regulators who already 
include the ``S'' in their rating systems. They also said the change 
will allow examiners to better communicate specific concerns to credit 
unions.
    A few commenters stated that the proposal added burden without any 
corresponding benefit and thus is unwarranted and unnecessary. One 
commenter believed that the amendment is not necessary because other 
components of CAMEL, including Capital, Asset Quality, and Liquidity, 
already evaluate market risk. This commenter stated that the proposal 
adds significant burden on both credit unions and examiners and is not 
necessary or valuable.

A. Comments Regarding Adopting the ``S'' Component

    One commenter requested that the NCUA release details about the 
agency's expectations of credit unions meeting any new standards for 
the ``S'' component and what this change will mean for the examination 
process.
    The NCUA will issue an updated Letter to Credit Unions that 
explains the criteria and standards for the ``S'' component and how 
this change will be incorporated into the examination process. 
Additionally, the NCUA Examiner's Guide will integrate the extensive 
discussion and tables set forth in the proposal that detailed the 
Board's expectations.
    With respect to the ``S'' component, the proposal noted that 
sensitivity to market risk reflects the exposure of a credit union's 
current and prospective earnings level and economic capital position 
arising from changes in market prices and interest rates. The Board 
noted that effective risk management programs include comprehensive IRR 
policies, appropriate and identifiable risk limits, clearly defined 
risk mitigation strategies, and a suitable governance framework. The 
Board further notes that Sensitivity to Market Risk ratings will be 
based on the proposed ``S'' component evaluation content and rating 
criteria.
    One commenter recommended that the ``S'' component should be 
examined by looking at asset liability modeling and engagement levels 
of the asset and liability management, loans, deposits, and investment 
committees. This commenter also stated that it would be beneficial to 
review the change in Net Economic Value of equity.
    The Board agrees that these factors should be considered in 
evaluating the ``S'' component and notes that examiners will continue 
to review them in their evaluation of IRR. The NCUA's LCU 16-CU-08, 
Revised Interest Rate Risk Supervision, and the related guidance that 
the NCUA implemented in 2017, was designed with the prospect of adding 
the ``S'' component and expressly details how the NCUA assesses IRR.
    One commenter requested that the Board specifically include a 
definition of ``market risk'' as it relates to various sensitivity 
factors. That commenter stated that the term ``market risk'' is used 
quite frequently in the descriptions of the proposed factors, but the 
term ``market risk'' is not clearly defined in the proposal.
    After reviewing the NCUA's Supervisory Guidance, Examiner's Guide, 
and regulations, the Board has determined that it is unnecessary to 
include a definition of ``market risk'' in the Code of Federal 
Regulations (CFR). Additionally, no discrete part of the NCUA's 
regulations addresses market risk in a dedicated section. Further, the 
proposal's sensitivity to market risk evaluation criteria clearly 
states that market risk represents the exposure of a credit union's 
current and prospective earnings and economic capital arising from 
changes in market prices and of interest rates. Additionally, the 
description of market risk is highly consistent with how other 
prudential regulators, such as the FDIC, Federal Reserve Board, and the 
OCC define market risk in their instructions to examiners.\18\ 
Therefore, the Board has determined the definition of market risk can 
effectively be addressed in an Letter to Credit Unions that will 
explain the CAMELS rating system and replace the existing letter.\19\
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    \18\ https://www.fdic.gov/regulations/safety/manual/section7-1.pdf (Section 7.1) (July 2018) https://occ.gov/publications-and-resources/publications/comptrollers-handbook/files/bank-supervision-process/pub-ch-bank-supervision-process.pdf (June 2018).
    \19\ NCUA LCU 07-CU-12 (December 2007).
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    A commenter sought clarity to better understand the methodology 
underlying the direct assessment of IRR. That commenter stated that the 
thresholds for assessment are a key aspect to maintaining a sound 
interest rate hedging strategy and managing interest rate sensitivity. 
The commenter asked if the NCUA will be able to provide context for 
differentiating a rise in interest rates from an ``adverse'' rise in 
interest rates, or from a ``materially adverse'' IRR exposure.
    The NCUA has previously provided this type of guidance about the 
methodology underlying the direct assessment of IRR in its LCU 16-CU-
08, Revised Interest Rate Risk Supervision, which details how NCUA 
examiners assess IRR. Credit unions are encouraged to review this 
guidance.
    The Board has determined that updating the NCUA's supervisory 
rating system from CAMEL to CAMELS by adding the ``S'' (Sensitivity to 
Market Risk) component to the existing CAMEL rating system as proposed 
and listed in the following table is appropriate and consistent with 
the NCUA's overall mission to ensure the safety and soundness of 
FICUs.\20\
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    \20\ 12 CFR 741.3(b)(5).
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``S'' Component for Sensitivity to Market Risk
    The sensitivity to market risk reflects the exposure of a credit 
union's current and prospective earnings and economic

[[Page 59285]]

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\
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    \21\ https://publishedguides.ncua.gov/examiner/Pages/default.htm#ExaminersGuide/IRR/_IRR_Overview.htm%3FTocPath%3DInterest%2520Rate%2520Risk%7C__0.
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    Sensitivity to Market Risk ratings are based on, but not limited 
to, the following evaluation factors:
     Sensitivity of a credit union's current and future 
earnings and economic value of capital to adverse changes in market 
prices and interest rates;
     Management's ability to identify, measure, monitor, and 
control exposure to market risk considering a credit union's size, 
complexity, and risk profile; and
     The nature and complexity of interest rate risk exposure.
    The Board has determined that updating the NCUA's 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 NCUA's overall mission to ensure the safety and soundness of 
FICUs.\22\ The 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 NCUA's 
revised rating system is consistent with the other financial 
supervisors.
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    \22\ 12 CFR 741.12.
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    Examiners will rate a credit union's ``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 union's 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.
2........................   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 union's 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.
3........................   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
                            union's earnings performance or capital
                            position.
                            The level of market risk taken is
                            high in relation to the credit union's
                            earnings or capital.
4........................   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 union's
                            earnings or capital.
5........................   The level of market risk taken or
                            exposure to market price or interest rate
                            changes is an imminent threat to the credit
                            union's viability.
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B. Comments Regarding Modifying the ``L'' Component

    One commenter stated that liquidity should be evaluated with 
respect to how a credit union maintains access to non-member 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 proposal's 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 NCUA's supervisory 
rating system from CAMEL to CAMELS by 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 NCUA's overall mission to ensure 
the safety and soundness of FICUs.\23\ The following discussion and 
table address the liquidity evaluation content and rating criteria.
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    \23\ 12 CFR 741.12.
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``L'' Component for Liquidity Risk
    In evaluating the adequacy of a credit union's 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 union's size, complexity, and risk profile. A 
credit union's liquidity risk 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 union's 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\
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    \24\ https://publishedguides.ncua.gov/examiner/Pages/default.htm#ExaminersGuide/Liquidity/Liquidity.htm%3FTocPath%3DLiquidity%7C__0.
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    A credit union's 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, management's

[[Page 59286]]

response when risk exposure approaches or exceeds the credit union's 
risk limits, and the prescribed corrective action taken when 
necessary.\25\
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    \25\ https://www.ncua.gov/files/letters-credit-unions/LCU2013-10-InteragencyPolicyStatementFunding.pdf.
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    Liquidity ratings are based on, but not limited to, the following 
evaluation factors:
     The adequacy of liquidity sources compared to present and 
future needs and the ability of the credit union to meet liquidity 
needs without adversely affecting its operations or condition;
     The availability of assets readily convertible to cash 
without undue loss;
     Access to sources of funding;
     The level of diversification of funding sources, both on- 
and off-balance sheet;
     The degree of reliance on short-term, volatile sources of 
funds to fund longer term assets;
     The trend and stability of deposits; and
     The capability of management to properly identify, 
measure, monitor, and control the credit union's liquidity position, 
including the effectiveness of funds management strategies, liquidity 
policies, management information systems, and contingency funding 
plans.
    The Board has determined that updating the NCUA's supervisory 
rating system from CAMEL to CAMELS by 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 NCUA's overall mission to ensure 
the safety and soundness of FICUs.\26\ The 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 NCUA's revised rating system is consistent with 
the other financial supervisors.
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    \26\ 12 CFR 741.12.
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    Examiners will rate a credit union's ``L'' CAMELS component rating 
on a scale of ``1'' to ``5''.

------------------------------------------------------------------------
       ``L'' rating                         Description
------------------------------------------------------------------------
1........................   The credit union has strong
                            liquidity levels.
                            The credit union has well-developed
                            funds management policies and practices.
                            The credit union has reliable access
                            to sufficient sources of funds on favorable
                            terms to meet present and anticipated
                            liquidity needs.
2........................   The credit union has satisfactory
                            liquidity levels.
                            The credit union has adequate funds
                            management policies and practices.
                            The credit union has access to
                            sufficient sources of funds on acceptable
                            terms to meet present and anticipated
                            liquidity needs.
3........................   The credit union has low liquidity
                            levels.
                            The credit union's funds management
                            policies and practices are not fully
                            commensurate with its size and complexity,
                            or the liquidity risks it has taken.
                            The credit union may lack ready
                            access to funds on reasonable terms.
4........................   The credit union has inadequate
                            liquidity levels.
                            The credit union's funds management
                            policies and practices are inadequate given
                            its size and complexity, or the liquidity
                            risks it has taken.
                            The credit union is likely not able
                            to obtain sufficient funds on reasonable
                            terms to meet liquidity needs.
5........................   Liquidity levels are so deficient
                            there is an imminent threat to the credit
                            union's viability.
                            The credit union requires
                            extraordinary external financial assistance
                            to meet maturing obligations or other
                            liquidity needs.
------------------------------------------------------------------------

C. Comments Regarding Technical Amendments in the Code of Federal 
Regulations

    The Board did not receive comments regarding the proposed technical 
amendments to the CFR. The CAMEL rating system is not in a separate 
section or part in the NCUA's regulations, but references to CAMEL 
appear in several parts in the CFR. NCUA regulations regularly refer to 
CAMEL composite ``1'' or ``2'' rated credit unions, which indicate the 
ability to safely support additional regulatory flexibility; or CAMEL 
composite ``4'' or ``5'' rated credit unions, which warrant increased 
regulatory scrutiny. The Board has determined that amending the term 
CAMEL to CAMELS in the following sections in the CFR as proposed is 
necessary with the decision to adopt the CAMELS rating system for both 
natural persons and corporate FICUs.

 Sec.  700.2 definition of Troubled condition
 Sec.  701.14 Change in official or senior executive officer in 
credit unions that are newly chartered or are in troubled condition
 Sec.  701.23 Purchase, sale, and pledge of eligible 
obligations
 Sec.  703.13 Permissible investment activities
 Sec.  703.14 Permissible investments
 Sec.  703.108 Eligibility
 Sec.  704.4 Prompt corrective action [for corporate credit 
unions]
 Sec.  713.6 Fidelity Bond and Insurance Coverage for FICUs

D. Other Comments

    Several commenters supported the proposal, stating it would enhance 
uniformity with other regulators. One commenter requested that the NCUA 
should adopt the UFIRS, which was approved by the FFIEC and used by the 
OCC, FDIC, the Federal Reserve Board, and many State Supervisory 
Authorities. The same commenter further suggested that the Board should 
keep its rating descriptions consistent with the rating descriptions 
for the ``L'' and ``S'' ratings used by other banking agencies by 
adopting the UFIRS in its entirety, stating the agency would benefit 
from not having to establish and maintain a separate authoritative 
framework for its examination rating system. The commenter stated that 
using the same CAMELS terminology but with different definitions from 
the UFIRS would create unnecessary confusion, impair a common 
understanding of the condition of financial institutions, create a 
disconnect with FFIEC guidance, and

[[Page 59287]]

impose additional regulatory costs and burdens on credit unions.
    The NCUA initially modeled its CAMEL rating system framework in 
1987 after the FFIEC's UFIRS, or CAMEL framework. Subsequently, FFIEC 
updated the CAMEL system to CAMELS in 1996. The NCUA continued to model 
subsequent amendments to its CAMEL system after the FFIEC's CAMELS 
framework. The Board's decision to add the ``S'' component and thus 
adopt the CAMELS rating system further enhances the consistency of the 
NCUA's rating system with the UFIRS system. The Board notes that the 
risk rating criteria for the ``S'' and ``L'' components are consistent 
with UFIRS. In addition, all other composite and component evaluation 
content and rating criteria are highly consistent with the FFIEC's 
CAMELS rating system. Consequently, the Board has determined that it is 
not necessary or beneficial to adopt UFIRS in its entirety.
    Another commenter requested that the NCUA address the consistency 
of the examination process, stating that it has varied over the years 
from examiner to examiner. The commenter noted that the added criteria, 
which the commenter referred to as bifurcating components, could create 
more inconsistencies.
    The NCUA has a framework in place that supports the uniform 
application of CAMEL. It includes annual supervisory priorities and 
examination scope updates, routine updates to the Examiner's Guide and 
National Supervisory Policy Manual, a standardized examination platform 
and training program, regional and national quality assurance and 
control programs, and periodic training that address the inter-
relationships between and among risk categories and the CAMEL rating 
implications. As with all examination systems across financial 
regulators, there is the need for examiner judgment to assess a 
particular situation; however, the Board believes that the agency has 
established processes that will support uniformity in the application 
of the CAMELS rating system.
    Several commenters expressed concern that the proposal would 
require changes to some credit union processes and procedures. One 
commenter was especially concerned that recent accounting changes to 
Current Expected Credit Losses may make the changes related to CAMELS 
more problematic, given the increased volatility in income statements. 
Another commenter expressed concern that changing the rating system 
will disrupt the examination process for credit unions, especially 
smaller credit unions. The commenter stated that even though this 
change will not likely be a problem for larger credit unions that 
already maintain separate policies to address these risks, it may 
impact smaller credit unions that do not already maintain separate 
policies. Such credit unions may be required to create new policies and 
train staff on procedures to monitor them to comply with the proposed 
rule. The commenter continued that smaller credit unions may not have 
reached the level of sophistication that is required by this change, 
thus creating a challenge for them.
    The Board believes that the changes will not result in an 
unreasonable burden on credit unions. As the commenters noted, 
typically larger credit unions already have processes, procedures, and 
systems in place. With respect to smaller credit unions (for example, 
those with assets less than $100 million, or 65 percent of credit 
unions as of June 2021), the Board believes that the changes will not 
impose a burden. Examiners of small credit unions will continue using 
the Estimated NEV Tool (ENT) to evaluate IRR.\27\ The ENT results 
inform the IRR category rating which in turn, would inform the ``S'' 
component rating. With the exception of the examination report 
separately disclosing the liquidity risk in the ``L'' component and 
sensitivity to market risk in the ``S'' component, the Board believes 
that small credit unions will experience minimal, if any, changes in 
examination procedures. Moreover, the change is an enhancement to the 
NCUA's supervision. Credit unions do not need to do anything more than 
they are already doing to comply with the policy requirements of the 
IRR Rule (Sec.  741.3(b)(5)).
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    \27\ NCUA LCU 16-CU-08 (October 2016).
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    One commenter stated that it is appropriate to implement the change 
in the first quarter of 2022 to allow credit unions to modify their 
systems. Several other commenters requested more lead time. One 
commenter suggested that the NCUA offer a transitional year in 2022, 
specifically performing examinations with the bifurcation but waiting 
to officially apply the ``S'' to the CAMEL rating until 2023. The 
commenter believed this delay would afford the NCUA time to complete 
the implementation of its new MERIT system and prepare clear internal 
guidance for examiners to follow along with clear guidance to the 
credit unions. Several other commenters recommended that the new rating 
system not be effective until at least six months after publication in 
the Federal Register noting the additional time would allow credit 
unions to adjust their reporting systems.
    Credit unions and other stakeholders are aware that the Board has 
been working toward the new CAMELS system. Specifically, the NCUA's 
Office of Inspector General issued a report recommending this change in 
2015 and issued a number of updates between 2016 and 2021 regarding the 
agency's CAMELS implementation status.\28\ Accordingly, the Board has 
determined that its plans to have the CAMELS system take effect on 
April 1, 2022, as proposed, is appropriate.
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    \28\ Review of NCUA's Interest Rate Risk Program, Report #OIG-
15-11, NCUA Office of Inspector Gen, (Nov. 13, 2015), available at 
https://www.ncua.gov/files/oig/NCUA_Semiannual_Report_Congress_March_2016.pdf.
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    One commenter stated that the NCUA should give credit unions the 
opportunity to comment should the NCUA decide to modify the rating 
descriptions used by the banking agencies.
    The Board does not anticipate any modifications of the rating 
descriptions used by the other financial regulators. Nevertheless, the 
Board notes that any substantive change to the CAMELS rating system--
either through recommendations by the FFIEC or at the Board's 
initiative--would generally be made through public notice and comment 
under the Administrative Procedure Act.
    One commenter provided a comment, beyond the scope of the proposal, 
that suggested the NCUA should establish and publish an examination 
policy stating that if a credit union's operations have not changed 
from previous years, yet the same circumstances are leading to a new 
finding or a downgrade of a credit union's composite rating under the 
new system, an automatic review will be triggered. Similarly, another 
commenter requested that the Board create a process to allow a credit 
union to appeal a component and composite CAMELS rating.
    The Board notes these comments are beyond the scope of the proposal 
and thus it would be inappropriate to make these changes in this 
rulemaking. The Board believes that it is more appropriate to address 
these issues in the supervisory process on a case-by-case basis. 
Further, credit unions currently may appeal composite CAMEL ratings of 
``3,'' ``4,'' or ``5,'' and component ratings that have a significant 
adverse effect on the nature or level of supervisory oversight.\29\
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    \29\ 12 CFR 746.103.

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[[Page 59288]]

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities.\30\ For purposes of 
this analysis, the NCUA considers small credit unions to be those 
having under $100 million in assets.\31\ The agency has determined that 
this rule will not significantly affect credit unions regardless of 
asset size because it is not adding any substantive requirement. 
Accordingly, the associated cost is minimal. The NCUA certifies the 
rule will not have a significant economic impact on a substantial 
number of small credit unions.
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    \30\ 5 U.S.C. 603(a).
    \31\ Interpretive Ruling and Policy Statement 03-2, 68 FR 31949 
(May 29, 2003) as amended by Interpretive Ruling and Policy 
Statement 13-1, 78 FR 4032 (Jan. 18, 2013).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 applies to rulemakings in which 
an agency by rule creates a new paperwork burden on regulated entities 
or modifies an existing burden.\32\ For purposes of the Paperwork 
Reduction Act of 1995, a paperwork burden may take the form of either a 
reporting or a recordkeeping requirement, both referred to as 
information collections. This rule imposes no new paperwork-related 
requirements. Therefore, this rule will not create new paperwork 
burdens or modify any existing paperwork burdens.
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    \32\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, the NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This rule will not have 
a substantial direct effect on the states, on the connection between 
the National Government and the states, or on the distribution of power 
and responsibilities among the various levels of government. The NCUA 
has determined this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General 
Government Appropriations Act, 1999.\33\
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    \33\ Public Law 105-277, 112 Stat. 2681 (1998).
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E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) generally provides for congressional review of agency 
rules.\34\ A reporting requirement is triggered in instances where the 
NCUA issues a final rule as defined by Sec.  551 of the Administrative 
Procedure Act. An agency rule, in addition to being subject to 
congressional oversight, may also be subject to a delayed effective 
date if the rule is a ``major rule.'' The NCUA does not believe this 
rule is a ``major rule'' within the meaning of the relevant sections of 
SBREFA. As required by SBREFA, the NCUA will submit this final rule to 
OMB for it to determine if the final rule is a ``major rule'' for 
purposes of SBREFA. The NCUA also will file appropriate reports with 
Congress and the Government Accountability Office so this rule may be 
reviewed.
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    \34\ 5 U.S.C. 551.
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List of Subjects

12 CFR part 700

    Credit unions.

12 CFR part 701

    Credit unions. Insurance. Reporting and recordkeeping requirements.

12 CFR part 703

    Credit unions. Investments. Reporting and recordkeeping 
requirements.

12 CFR part 704

    Corporate Credit Unions, Prompt Corrective Action

12 CFR part 713

    Bonds. Credit unions. Insurance.

    By the National Credit Union Administration Board on October 21, 
2021
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed in the preamble, the Board amends 12 CFR 
parts 700, 701, 703, 704, and 713 as follows:

PART 700--DEFINITIONS

0
1. The authority citation for part 700 continues to read as follows:

    Authority: 12 U.S.C. 1752, 1757(6), 1766.


Sec.  700.2   [Amended]

0
2. In Sec.  700.2, amend the definition of ``troubled condition'' by 
removing the word ``CAMEL'' and adding in its place the word 
``CAMELS'', wherever it appears.

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
3. The authority citation for part 701 continues to read as follows:

    Authority:  12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1788, 1789. 
Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 
is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 
3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.


Sec.  701.14   [Amended]

0
4. Amend Sec.  701.14, in paragraphs (b)(3)(i) and (ii) and (b)(4)(i) 
and (ii), by removing the word ``CAMEL'' and adding in its place the 
word ``CAMELS''.


Sec.  701.23  [Amended]

0
5. Amend Sec.  701.23, in paragraph (b)(2) introductory text, by 
removing the word ``CAMEL'' and adding in its place the word 
``CAMELS.''

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

0
6. The authority citation for part 703 continues to read as follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), and 1757(15).


Sec.  703.13  [Amended]

0
7. Amend Sec.  703.13, in paragraph (d)(3)(iii), by removing the word 
``CAMEL'' and adding in its place the word ``CAMELS''.


Sec.  703.14  [Amended]

0
8. Amend Sec.  703.14, in paragraphs (i) and (j)(4), by removing the 
word ``CAMEL'' and adding in its place the word ``CAMELS'', and in 
paragraph (j)(4) by removing the word ``subparagraph'' and adding 
``paragraph (j)(4)'' in its place.

PART 704--CORPORATE CREDIT UNIONS

0
9. The authority citation for part 704 continues to read as follows:

    Authority:  12 U.S.C. 1766(a), 1781, 1789.


Sec.  704.4  [Amended]

0
10. Amend Sec.  704.4, in paragraph (d)(3)(ii), by removing the word 
``CAMEL'' and adding in its place the word ``CAMELS''.

[[Page 59289]]

PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERALLY 
INSURED CREDIT UNIONS

0
11. The authority citation for part 713 continues to read as follows:

    Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 
1789(a)(11).


Sec.  713.6  [Amended]

0
12. Amend Sec.  713.6, wherever it appears in the table in paragraph 
(a)(1) and paragraph (c), by removing the word ``CAMEL'' and adding in 
its place the word ``CAMELS''.
[FR Doc. 2021-23332 Filed 10-26-21; 8:45 am]
BILLING CODE 7535-01-P