LANSING, Mich. (4/29/14)--The Michigan financial services regulator has let state-chartered credit unions know that as of April 10 his department has adopted a modified CAMELS rating system--one that includes the "sensitivity to market" or "S" component.
The regulator specifically noted, however, that while the "S" rating will now be separately reported, supervisory expectations for credit unions' management of market risk remain the same.
In a letter to directors and management of Michigan state-chartered credit unions, John J. Kolhoff noted that "OCU believes the implementation of the distinct 'S' rating is prudent at this time."
The CAMELS system is a supervisory ranking structure meant to reflect a financial institution's overall condition. Federal regulators will assign a financial institution a CAMELS 1 ranking for the best overall condition, down to a CAMELS 5 for the worst. The acronym stands for capital adequacy, assets, management capability, earnings, liquidity (or liability management), and for Michigan and some other regulators, sensitivity (especially to interest rate risk).
Kolhoff said the sensitivity component addresses the degree to which interest rate changes can impact a credit union's earnings or net worth and its adoption reflects a recognition of the "increasing balance sheet complexity within the industry." It also ensures, the letter says, improved assessment and supervisory communication regarding IRR and liquidity exposure and management.
Michigan Credit Union League & Affiliates CEO David Adams said of the state regulator's change, "Interest rate risk exposure is something that credit unions and their regulators are keenly aware of and appropriately concerned about. While it is 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, the OCU included the CAMELS Rating Determinations portion of its Policies and Procedures Manual.