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The NCUA during its October meeting issued a final regulation to add an “S” component to the CAMEL rating system, which rates a credit union’s sensitivity to the market.

The final rule also redefines the “L,” or liquidity risk, component in the CAMEL system (S was formerly part of the L rating).

The final rule will go into effect April 1, 2022; the NCUA Board will implement the addition of the “S” component and redefinition of the “L” rating for examinations and contacts started on or after that date.

NCUA has indicated it will provide training programs during the first quarter of 2022 and this final rule is unlikely to change the CAMELS rating of a credit union. For credit unions where market risk is not a significant issue, less weight will be put on interest rate risk than other rating components, whereas for those with higher market risk issues, more weight will be put on the interest rate components.

What does it take to get an S rating of 2:

1. Market #risk sensitivity is adequately controlled and that there is only moderate potential that the earnings performance or capital position will be adversely affected;

2. Risk management practices are satisfactory for the size, sophistication, and market risk accepted by the #creditunion; and ,

3. The level of earnings and capital provide adequate support for the degree of market risk taken by the credit union

What is an S - Code 3:

1. Control of market risk sensitivity needs improvement or that there is significant potential that the earnings performance or capital position will be adversely affected;

If you would like to discuss this or your current challenge, message at and we can set up a free strategy session.

A PDF of the Regulation can be found here:

Below the starred line is the entire text of the new rule.


7535-01-U 2 NATIONAL CREDIT UNION ADMINISTRATION 3 12 CFR Parts 700, 701, 703, 704, 713 4 RIN: 3133-AF32 5 CAMELS RatingSystem 6 AGENCY: National Credit Union Administration (NCUA). 7 ACTION: Final rule. SUMMARY: The NCUA Board (the Board)is updating the NCUA’ssupervisory rating system from CAMELto 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 enhancetransparency and allow the NCUA andfederally 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 componentand a redefined “L” rating for examinations and contacts startedon or after April 1, 2022.

8 DATES: The rule becomeseffective April 1, 2022. 9 FOR FURTHER INFORMATION CONTACT: Thomas Fay, Director of Capital Marketsat 10 (703) 518-1179 or RobertBruneau, Senior CapitalMarkets Specialist at (703) 945-2491,Office 11 of Examination and Insurance; or Marvin Shaw, Senior Staff Attorney, Office of General 22 Counsel,at (703) 518-6540. 23 SUPPLEMENTARYINFORMATION: 24 I. Legal Authority and Background 25 The Board is issuing this final rule pursuant to its authority under the FederalCredit 26 Union Act (the Act).1 Under the Act, the NCUA is the chartering and supervisory authority for 27 federal credit unions(FCUs) and the federal supervisory authority for federally insured credit 28 unions (FICUs).2 The Act grantsthe NCUA a broad mandateto issue regulations governingboth 29 FCUs and FICUs. Section 120 of the Act is a general grant of regulatory authority and 30 authorizes the Board to prescribe regulations for the administration of the Act.3 Section 209 of 31 the Act is a plenary grant of regulatory authorityto the NCUA to issue regulations necessary or 32 appropriate to carry out its role as share insurer for all FICUs.4 The Act also includes an express 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

33 grant of authority for the Board to subject federally chartered central, or corporate, credit unions 34 to such rules, regulations, and orders as the Board deems appropriate.5 35 As part of its supervisory activities, the NCUA adopted the CAMEL rating system in 36 1987.6 Through CAMEL ratings, the NCUA sought to account for and reflectall significant 37 financial, operational, and management factors that examiners assessin their evaluation of a 38 credit union's performance and risk profile. Under this system, as specifiedin the 2007 Letter to 39 Credit Unions (LCU), the NCUA assigns each credit union a composite CAMEL rating and five 40 component ratings based on the agency’s evaluation of a creditunion’s financial condition and 41 operations.7 The five components addressa credit union’s: 42 · Capital adequacy; 43 · Asset quality; 44 · Management; 45 · Earnings; and 46 · Liquidity and asset liability management. 47 Examiners assign composite and component CAMEL ratings using a scalethat ranges 48 from “1” to “5.” The highest rating is a “1,” indicating the strongest performance and risk 49 management practices, and the least degreeof supervisory concern. The lowest rating is a “5,” 50 indicating the weakestperformance, inadequate risk management practices, and the highest 5 12 U.S.C. 1766(a) 6 NCUA LCU No. 93(September 25, 1987) 7 NCUA LCU 07-CU-12(December 2007)

51 degree of supervisory concern. Examinersrate these components based upon qualitative and 52 quantitative factors usingtheir professional judgement. 53 In 1997, membersof the Federal Financial Institutions Examination Council (FFIEC), 54 with the exception of the NCUA, proposed and subsequently adopted revisions to the Uniform 55 Financial Institutions Rating System (UFIRS).8 The FFIEC released a Policy Statement at that 56 time to reaffirmthe five CAMEL ratingsystem components and added a sixth component, 57 Sensitivity to Market Risk (“S”),to address price and interest rate risks (IRR).9 The NCUA 58 opted not to use the “S” component based onthe relative lack of complexity in the consolidated 59 balance sheets of credit unions at the time. Instead, the NCUA retainedits existing CAMEL 60 rating system. 61 However, since 1997, credit union balance sheets have grown larger and more complex. 62 For example, the credit union industry significantly increased the percentage of holdings in 63 mortgage related assets to totalassets from 19 percent in 1997 to 45 percent in June 2021. 64 Accordingly, the NCUA has made several modifications to the CAMEL ratingsystem since 65 1997. These involved changes to financial ratios, adding and subsequently eliminating a 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 ConsumerProtection Act. See Section 312 of Pub. L. 111-203. 9 62 FR 752, (Jan.6, 1997).

66 CAMEL matrix, accommodating the adoption of Prompt Corrective Action, and incorporating 67 the NCUA’s risk-focused exam approach.10,11 68 As balance sheetsof natural person creditunions have becomelarger and more complex, 69 the NCUA has consistently providedsupervision and guidance regarding IRR to the credit union 70 industry. The NCUA also advised credit unions that IRR was a supervisory priority from 2012 71 through 2019.12 72 In 2012, the Board implemented regulations that introduced standards and expectations 73 affecting examiner procedures and the NCUA’sIRR assessment requirements. The NCUA’s 74 IRR rule became effective for credit unionsin September 2012. The rule requires insured credit 75 unions that have more than $50 million in assets to maintain a writtenIRR policy and an 76 effective IRR management program.13 77 In April 2014, the NCUA also finalized its derivatives rule and subsequently amended it 78 in May 2021. The amendments modernize the NCUA’s derivatives rule and make itmore 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 capitalstandards and corresponding remedies to improvethe net worth of federallyinsured “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) 12 See, e.g., NCUA LCU 19-CU-01 (January2019) 13 77 FR 5155 (Feb. 2, 2012). See 12 CFR 741.3, 12 CFR 741, app.A.

79 principles-based, while retaining key safety and soundness components. The changes provide 80 more flexibility for qualified FCUs to manage IRR through the use of derivatives.14 81 In January 2017, the NCUA also implemented its revised IRR supervision program 82 incorporating the regulatory requirements from § 741.3(b)(5) (IRR) and subpart B to part 703 83 (derivatives), enhancing examiner guidance, improving the consistency of IRR ratings,and 84 identifying outlier credit unions with excessive IRR levels.15 85 II. Proposed Rule 86 On January 14, 2021, the Board approvedissuing a notice proposing to amend the 87 existing CAMEL rating system by adding an “S” component to assess sensitivity to market risk 88 and modify the “L” component to include only liquidity evaluation content and ratingcriteria.16 89 The Board explained that these changes would provide greaterclarity and transparency regarding 90 credit unions’ sensitivity to market and liquidity risk exposures. The Board further explained 91 that the proposed changes would make the NCUA’s rating system more consistent with the other 92 banking agencies’ rating systems at the federal and state levels.17 14 86 FR 28241 (May 26, 2021) 15 NCUA LCU 16-CU-08(October 2016) 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 adoptedthe “S” component.

93 In support of the proposal, the Board explainedthat changes in the size and complexity of 94 FICUs warranted the changes and that increased complexity typicallyrequires greater focuson 95 interest rate and liquidity risk profiles. 96 The Board noted that separating the “S” and “L” component ratings will allow NCUA to 97 better: 98 · Monitor sensitivity to market and liquidityrisks in the credit union system; 99 · Communicate specificconcerns to individual credit unions; and 100 · Allocate resources. 101 III. Final Rule and Public Comments on the Proposed Rule 102 The Board solicited public comments over a 60-day comment period and received16 103 comments. Commenters includedcredit union trade associations, state credit unionleagues, an 104 organization of state credit union supervisors, credit unions,and individuals. Most commenters 105 supported the proposal. Several expressed concern about the proposal’s implementation, 106 particularly about the associated compliance costs and the need for consistent application across 107 the NCUA regionsand examiners. 108 As noted previously, commentersgenerally supported the proposal, stating that it would 109 provide more precisesupervision of credit unions. One trade association stated that the change 110 will add clarity and transparency. That commenteralso stated that this change recognizes that 111 there is a difference between market sensitivity and liquidity risk, so separating the two 112 components makes sense even if they are interrelated. Additionally, several commenters stated 113 that the proposed change would enhance consistency with other financial institution rating

114 systems, specifically for FDIC-insured financial institutions. These commenters statedthe 115 change would enhance consistency with several state credit union regulators who already include 116 the “S” in their ratingsystems. They also said the change will allow examiners to better 117 communicate specific concernsto credit unions. 118 A few commenters statedthat the proposal added burden without any corresponding 119 benefit and thus is unwarranted and unnecessary. One commenter believed that the amendment 120 is not necessary because other components of CAMEL, including Capital,Asset Quality, and 121 Liquidity, already evaluatemarket risk. This commenter stated that the proposaladds significant 122 burden on both creditunions and examinersand is not necessary or valuable. 123 A. Comments Regarding Adopting the “S” Component 124 One commenter requestedthat the NCUA releasedetails about the agency’sexpectations 125 of credit unionsmeeting any new standardsfor the “S” component and what this change will 126 mean for the examination process. 127 The NCUA will issue an updated Letter to CreditUnions that explains the criteria and 128 standards for the “S”component and how this change will be incorporated into the examination 129 process. Additionally, the NCUA Examiner’s Guide will integrate the extensive discussion and 130 tables set forth in the proposal that detailed the Board’s expectations. 131 With respect to the “S” component, the proposal noted that sensitivity to market risk 132 reflects the exposureof a credit union’s currentand prospective earnings level and economic 133 capital position arising from changes in marketprices and interest rates. The Board notedthat

134 effective risk management programs include comprehensive IRR policies, appropriate and 135 identifiable risk limits, clearly defined risk mitigation strategies, and a suitablegovernance 136 framework. The Board furthernotes that Sensitivity to Market Risk ratings will be based on the 137 proposed “S” component evaluation content and rating criteria. 138 One commenter recommended that the “S” component should be examined by looking at 139 asset liability modelingand engagement levelsof the asset and liability management, loans, 140 deposits, and investment committees. This commenteralso stated that it would be beneficial to 141 review the change in Net Economic Value ofequity. 142 The Board agrees that these factorsshould be considered in evaluating the “S” 143 component and notes that examiners will continue to review them in their evaluation of IRR. 144 The NCUA’s LCU 16-CU-08, Revised Interest Rate Risk Supervision, and the relatedguidance 145 that the NCUA implemented in 2017, was designed with the prospect of adding the “S” 146 component and expressly details how the NCUA assessesIRR. 147 One commenter requestedthat the Board specifically include a definition of “market 148 risk” as it relates to various sensitivity factors. That commenter stated that the term “market 149 risk” is used quite frequently in the descriptions of the proposed factors, but the term “market 150 risk” is not clearly defined in the proposal. 151 After reviewing the NCUA’sSupervisory Guidance, Examiner’s Guide, and regulations, 152 the Board has determined that it is unnecessary to include a definition of “market risk” in the 153 Code of FederalRegulations (CFR). Additionally, no discrete part of the NCUA’sregulations

154 addresses market risk in a dedicatedsection. Further, the proposal’s sensitivity to market risk 155 evaluation criteria clearlystates that marketrisk represents the exposureof a credit union’s 156 current and prospective earnings and economiccapital arising from changesin market pricesand 157 of interest rates. Additionally, the description of market risk is highly consistent with how other 158 prudential regulators, such asthe FDIC, FederalReserve Board, and theOCC define market risk 159 in their instructions to examiners.18 Therefore, the Board has determined the definition of market 160 risk can effectively be addressedin an Letter to Credit Unions that will explainthe CAMELS 161 rating system and replace the existing letter.19 162 A commenter sought clarity to better understand the methodology underlying the direct 163 assessment of IRR. That commenter statedthat the thresholds for assessment are a key aspect to 164 maintaining a sound interestrate hedging strategyand managing interest rate sensitivity. The 165 commenter asked if the NCUA will beable to provide contextfor differentiating a risein interest 166 rates from an “adverse” rise in interest rates, or from a “materially adverse” IRR exposure. 167 The NCUA has previously provided this type ofguidance about the methodology 168 underlying the directassessment of IRR in its LCU 16-CU-08, Revised Interest Rate Risk 169 Supervision, which detailshow NCUA examiners assessIRR. Credit unions are encouraged to 170 review this guidance. 18 (Section 7.1) (July 2018) ch-bank-supervision-process.pdf (June 2018) 19 NCUA LCU 07-CU-12(December 2007)

171 The Board has determined that updating the NCUA’s supervisory rating system from 172 CAMEL to CAMELS by adding the “S” (Sensitivity to Market Risk)component to the existing 173 CAMEL rating system as proposed and listed in the following table is appropriate and consistent 174 with the NCUA’soverall mission to ensure the safety and soundness of FICUs.20 175 “S” Component for Sensitivity to Market Risk 176 The sensitivity to market risk reflects the exposure of a credit union’s current and 177 prospective earnings and economic capital arising from changes in market prices and interest 178 rates. Effective risk management programs include comprehensive interest rate risk policies, 179 appropriate and identifiable risk limits, clearlydefined risk mitigation strategies, and a suitable 180 governance framework.21 181 Sensitivity to Market Risk ratingsare based on, but notlimited to, the following 182 evaluation factors: 183 · Sensitivity of a credit union's current and future earningsand economic value of 184 capital to adverse changesin market prices and interest rates; 185 · Management’s ability to identify, measure,monitor, and controlexposure to 186 market risk considering a credit union’s size, complexity, and risk profile; and 187 · The nature and complexity of interest rate risk exposure. 20 12 CFR 741.3(b)(5). 21 3FTocPath%3DInterest%2520Rate%2520Risk%7C 0

188 The Board has determined that updating the NCUA’s supervisory rating system from 189 CAMEL to CAMELS by adding the S” component to the existing CAMEL rating system to 190 evaluate sensitivity to market risk and adding rating criteria as outlined in the proposedrule, 191 along with the added evaluation factor examples, is appropriate and consistent with the NCUA’s 192 overall mission to ensure the safety and soundness of FICUs.22 The Board notes that the updated 193 rating system is based on,and is consistent with, the UFIRS system utilized by the other 194 prudential regulators. Nevertheless, the Board made certain minor, non-substantive 195 modifications to the rating descriptions to clarify and betterreflect supervision of credit unions. 196 Notwithstanding this slightdivergence from UFIRs,the Board has determined that the NCUA’s 197 revised rating systemis consistent with the other financial supervisors. 198 Examiners will rate a creditunion’s “S” CAMELS rating componenton a scale of “1” to 199 “5”. “S” Rating Description 1 · Risk management practices and controls for marketrisk are strong for the size and sophistication of the creditunion, and the level of market risk ithas accepted. · There is minimal potential formarket price or interest rate changes to createa material adverse effect on the credit union’searnings performance or capital position. 22 12 CFR 741.12.

“S” Rating Description· The credit union has more than sufficient earnings and capital to support the level of market risktaken 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 hasaccepted. · 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’searnings performance or capital position. · The level of market risk taken is high in relation to the credit union’s earnings or capital.

“S” Rating Description 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 creditunion. · 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 animminent threat to the creditunion’s viability. 200 B. Comments Regarding Modifying the “L” Component 201 One commenter stated that liquidity should be evaluated with respect to how a credit 202 union maintains access to non-member funds and tracking member balances as well as cash flow 203 projections and stresstesting. 204 The NCUA agrees that a liquidity review should include these items. The Board notes 205 that the proposal’s liquidity evaluation content is comprehensive and addresses liquidity sources 206 as well as liquidity measurements under various scenarios. However, the Board is adding

207 examples of liquidityevaluation factors to the evaluation content to enhance the clarity of its 208 expectations and consistency with UFIRS. 209 The Board has determined that updating the NCUA’s supervisory rating system from 210 CAMEL to CAMELS by modifying the “L” (Liquidity Risk) component in the existing CAMEL 211 rating system to include only liquidity evaluation content and rating criteria as outlined in the 212 proposed rule, along with the added evaluation factor examples, is appropriate and consistent 213 with the NCUA’soverall mission to ensure the safety and soundness of FICUs.23 The following 214 discussion and table address the liquidity evaluation content and rating criteria. 215 “L” Componentfor Liquidity Risk 216 In evaluating the adequacy of a credit union’s liquidity profile, examinersconsider the 217 current and prospective sources of liquidity compared to funding needs and the adequacy of 218 liquidity risk management relative to a credit union’ssize, complexity, and risk profile. A credit 219 union’s liquidity risk management practices should ensure the credit union maintains sufficient 220 liquidity to timely meet itsfinancial obligations and member share and loan demands. These 221 practices should reflect the credit union’s ability to manage unplanned changes in funding 222 sources, respond to changes in market conditions affecting its abilityto quickly liquidate assets 223 with minimal loss, ensure liquidity is maintained at a reasonable cost, and limit relianceon 23 12 CFR 741.12.

224 funding sources that may not be available in times of financial stress or adverse changes in 225 market conditions.24 226 A credit union’sliquidity risk management practices should also be commensurate with 227 the complexity of the balance sheet and its capital adequacy. This includes evaluating the 228 reporting mechanisms in place to monitor and control risk, management’s response when risk 229 exposure approaches or exceeds the credit union’s risk limits, and the prescribed corrective 230 action taken when necessary.25 231 Liquidity ratings are based on, but not limited to, the following evaluation factors: 232 · The adequacy of liquidity sources compared to present and future needs and the 233 ability of the credit union to meet liquidity needs withoutadversely affecting its 234 operations or condition; 235 · The availability of assets readily convertible to cash without undue loss; 236 · Access to sources of funding; 237 · The level of diversification of funding sources,both on- and off-balance sheet; 238 · The degree of reliance on short-term, volatile sourcesof funds to fund longer term 239 assets; 240 · The trend and stability of deposits; and 24 3FTocPath%3DLiquidity%7C 0 25

241 · The capability of management to properly identify, measure, monitor,and control 242 the credit union’sliquidity position, including the effectiveness of funds 243 management strategies, liquidity policies, management information systems, and 244 contingency funding plans. 245 The Board has determined that updating the NCUA’s supervisory rating system from 246 CAMEL to CAMELS by modifying the “L” (Liquidity Risk) component in the existing CAMEL 247 rating system to includeonly liquidity evaluation content and rating criteriaas outlined in the 248 proposed rule, along with the added evaluation factor examples,is appropriate and consistent 249 with the NCUA’soverall mission to ensure the safety and soundness of FICUs.26 The Board 250 notes that the updated rating system is based on, and is consistent with, the UFIRSsystem 251 utilized by the other prudential regulators. Nevertheless, the Board made certain minor, non- 252 substantive modifications to therating descriptions to clarify and better reflect supervision of 253 credit unions. Notwithstanding this slightdivergence from UFIRs, the Board hasdetermined 254 that the NCUA’srevised rating system is consistent with the other financial supervisors. 255 Examiners will rate a creditunion’s “L” CAMELScomponent rating on a scale of “1” to 256 “5”. “L” Rating Description 1 · The credit unionhas strong liquidity levels 26 12 CFR 741.12.

“L” Rating Description· 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 presentand 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 fundson 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 ableto obtain sufficient funds on reasonable termsto meet liquidity needs.

“L” Rating Description 5 · Liquidity levels are so deficient there is an imminent threat to the creditunion’s viability. · The credit unionrequires extraordinary external financial assistance to meet maturing obligations or other liquidity needs. 257 C. Comments Regarding Technical Amendments in the Code of Federal 258 Regulations 259 The Board did not receive comments regarding the proposed technical amendments to the 260 CFR. The CAMEL rating system is not in a separate section or part in the NCUA’s regulations, 261 but references to CAMEL appear in several parts in the CFR.NCUA regulations regularly refer 262 to CAMEL composite“1” or “2” rated creditunions, which indicate the ability to safely support 263 additional regulatory flexibility; or CAMEL composite “4” or “5” rated creditunions, which 264 warrant increased regulatory scrutiny.The Board has determined that amending the term 265 CAMEL to CAMELS in the following sections in the CFR as proposed is necessary with the 266 decision to adoptthe CAMELS rating system for both natural personsand corporate FICUs. 267 · § 700.2 definition of Troubled condition 268 · § 701.14 Change in official or senior executive officer in credit unionsthat are newly 269 chartered or are in troubled condition 270 · § 701.23 Purchase, sale, and pledgeof eligible obligations 271 · § 703.13 Permissible investment activities

272 · § 703.14 Permissible investments 273 · § 703.108 Eligibility 274 · § 704.4 Prompt corrective action [for corporate credit unions] 275 · § 713.6 Fidelity Bond and InsuranceCoverage for FICUs 276 D. Other Comments 277 Several commenters supported the proposal, stating it would enhance uniformity with 278 other regulators. One commenter requested that the NCUA should adopt the UFIRS, which was 279 approved by the FFIEC and used by the OCC, FDIC, the Federal ReserveBoard, and many State 280 Supervisory Authorities. The same commenter further suggested that the Board should keep its 281 rating descriptions consistent with the rating descriptions for the “L” and “S” ratings used by 282 other banking agenciesby adopting the UFIRS in its entirety, stating the agency would benefit 283 from not having to establish and maintain a separate authoritative framework for its examination 284 rating system. The commenter stated that using the same CAMELS terminology but with 285 different definitions from the UFIRS would create unnecessary confusion, impair a common 286 understanding of the condition of financial institutions, create a disconnect with FFIEC guidance, 287 and impose additional regulatory costs and burdens on credit unions. 288 The NCUA initially modeledits CAMEL rating system framework in 1987 after the 289 FFIEC’s UFIRS, or CAMELframework. Subsequently, FFIEC updated the CAMEL systemto 290 CAMELS in 1996. The NCUA continued to model subsequent amendments to its CAMEL 291 system after the FFIEC’s CAMELS framework. The Board’s decision to add the “S” component 292 and thus adopt the CAMELS rating system further enhancesthe consistency of the NCUA’s 293 rating system with the UFIRS system.The Board notes that the risk rating criteriafor the “S”

294 and “L” components are consistent with UFIRS. In addition, all other composite and component 295 evaluation content and rating criteriaare highly consistent with the FFIEC’sCAMELS rating 296 system. Consequently, the Board has determined that it is not necessary or beneficial to adopt 297 UFIRS in its entirety. 298 Another commenter requested that theNCUA address the consistency of the examination 299 process, stating that it has varied over the years from examinerto examiner. The commenter 300 noted that the added criteria, which the commenterreferred to as bifurcating components, could 301 create more inconsistencies. 302 The NCUA has a framework in place that supports the uniform application of CAMEL. 303 It includes annual supervisory priorities and examination scope updates, routine updatesto the 304 Examiner’s Guide and National Supervisory Policy Manual, a standardized examination 305 platform and trainingprogram, regional and national quality assurance and control programs, and 306 periodic training that address the inter-relationships betweenand among risk categories and the 307 CAMEL rating implications. As with all examination systems acrossfinancial regulators, there 308 is the need for examinerjudgment to assessa particular situation; however,the Board believes 309 that the agency has established processes that willsupport uniformity in the application of the 310 CAMELS rating system. 311 Several commenters expressed concern that the proposalwould require changesto some 312 credit union processes and procedures. One commenter was especially concerned that recent 313 accounting changes to Current Expected Credit Losses may make the changes related to 314 CAMELS more problematic, given the increased volatility in incomestatements. Another

315 commenter expressed concern that changing the rating system will disrupt the examination 316 process for credit unions, especially smaller credit unions.The commenter statedthat even 317 though this change will not likely be a problem for larger credit unions that already maintain 318 separate policies to address these risks, it may impact smaller credit unions that donot already 319 maintain separate policies. Such credit unions may be requiredto create new policiesand train 320 staff on procedures to monitor them to complywith the proposedrule. The commenter 321 continued that smaller credit unions may not have reached the level of sophistication that is 322 required by this change,thus creating a challenge for them. 323 The Board believes that thechanges will not resultin an unreasonable burden on credit 324 unions. As the commenters noted,typically larger credit unions alreadyhave processes, 325 procedures, and systems in place. With respect to smaller credit unions (for example, those with 326 assets less than $100 million, or 65 percent of credit unions asof June 2021), the Board believes 327 that the changes will not impose a burden. Examiners of small credit unionswill continue using 328 the Estimated NEV Tool (ENT)to evaluate IRR.27 The ENT results inform the IRR category 329 rating which in turn, would inform the “S” component rating. With the exception of the 330 examination report separately disclosing the liquidity risk inthe “L” component and sensitivity 331 to market risk in the “S” component, the Board believes that small credit unions will experience 332 minimal, if any, changes in examination procedures. Moreover, the changeis an enhancement to 333 the NCUA’s supervision. Credit unions do not need to do anything more than they are already 334 doing to comply with the policy requirements of the IRR Rule (§ 741.3(b)(5)). 27 NCUA LCU 16-CU-08(October 2016)

335 One commenter stated that it is appropriate to implement the change in the first quarter of 336 2022 to allow credit unions to modify their systems.Several other commenters requested more 337 lead time. One commenter suggested that the NCUA offer a transitional year in 2022, 338 specifically performing examinations with thebifurcation but waiting to officially apply the “S” 339 to the CAMEL rating until 2023. The commenterbelieved this delay would afford the NCUA 340 time to completethe implementation of its new MERIT system and prepare clear internal 341 guidance for examinersto follow along with clear guidance to the credit unions. Severalother 342 commenters recommended that the new rating system not be effective until at least six months 343 after publication in the Federal Register noting the additional time would allow creditunions to 344 adjust their reporting systems. 345 Credit unions and other stakeholders are aware that the Board has been working toward 346 the new CAMELS system. Specifically, the NCUA’s Officeof Inspector Generalissued a report 347 recommending this change in 2015 and issued a number of updatesbetween 2016 and 2021 348 regarding the agency’s CAMELS implementation status.28 Accordingly, the Boardhas 349 determined that its plans to havethe CAMELS system take effect on April 1, 2022, as proposed, 350 is appropriate. 351 One commenter stated that the NCUA should give credit unions the opportunity to 352 comment should the NCUA decide to modify the rating descriptions used by the banking 353 agencies. 28 Review of NCUA’s Interest Rate Risk Program, Report #OIG-15-11, NCUA Office of Inspector Gen, (Nov. 13, 2015), available at

354 The Board does not anticipate any modifications of the ratingdescriptions used by the 355 other financial regulators. Nevertheless, the Board notes that any substantive change to the 356 CAMELS rating system—either throughrecommendations by the FFIEC or at the Board’s 357 initiative—would generally be made through public notice and comment under the 358 Administrative Procedure Act. 359 One commenter provideda comment, beyond the scopeof the proposal, that suggested 360 the NCUA should establish and publish an examination policy stating that if a credit union’s 361 operations have not changed from previous years,yet the same circumstances are leading to a 362 new finding or a downgrade of a credit union’scomposite rating under the new system,an 363 automatic review will be triggered. Similarly, another commenter requested that the Board 364 create a processto allow a credit union to appeal a component and composite CAMELSrating. 365 The Board notes these comments are beyond the scope of the proposaland thus it would 366 be inappropriate to make these changes in this rulemaking. The Board believes that it is more 367 appropriate to address theseissues in the supervisory process on a case-by-case basis. Further, 368 credit unions currently may appeal composite CAMELratings of “3,” “4,” or “5,” and 369 component ratings that have a significant adverse effecton the nature or level of supervisory 370 oversight.29 29 12 CFR 746.103.

371 IV. Regulatory Procedures 372 A. Regulatory Flexibility Act 373 The Regulatory Flexibility Act requires the NCUA to prepare an analysis to describe any 374 significant economic impact a regulation may have on a substantial number of small entities.30 375 For purposes of this analysis, the NCUA considers small credit unions to be those having under 376 $100 million in assets.31 The agency has determined that this rule will not significantly affect 377 credit unions regardless of asset size because it is not adding any substantive requirement. 378 Accordingly, the associated cost is minimal.The NCUA certifies the rule will not have a 379 significant economic impacton a substantial number of small credit unions. 380 B. Paperwork Reduction Act 381 The Paperwork ReductionAct of 1995 applies to rulemakings in which an agency by rule 382 creates a new paperworkburden on regulated entities or modifies an existing burden.32 For 383 purposes of the Paperwork ReductionAct of 1995, a paperwork burden may take the form of 384 either a reporting or a recordkeeping requirement, both referred to as information collections. 385 This rule imposesno new paperwork-related requirements. Therefore, this rule willnot create 386 new paperwork burdens or modify any existing paperwork burdens. 30 5 U.S.C. 603(a). 31 InterpretiveRuling 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). 32 44 U.S.C. 3507(d); 5 CFR part 1320.

387 C. Executive Order 13132 388 Executive Order 13132 encourages independent regulatory agenciesto consider the 389 impact of their actions on state and local interests. In adherence to fundamental federalism 390 principles, the NCUA, an independent regulatory agency as definedin 44 U.S.C. 3502(5), 391 voluntarily complies with the executive order. This rule will not have a substantial direct effect 392 on the states, on the connection between the National Government and the states, or on the 393 distribution of power and responsibilities among the various levels of government. The NCUA 394 has determined this rule does not constitute a policy that has federalism implications for purposes 395 of the executive order. 396 D. Assessment of Federal Regulations and Policieson Families 397 The NCUA has determined that this rule will not affect family well-being within the 398 meaning of Section 654 of the Treasuryand General Government Appropriations Act, 1999.33 399 E. Small BusinessRegulatory Enforcement FairnessAct 400 The Small BusinessRegulatory Enforcement Fairness Act of 1996 (SBREFA) generally 401 provides for congressional review of agency rules.34 A reporting requirement is triggered in 402 instances where the NCUA issues a final rule as defined by § 551 of the Administrative 403 Procedure Act. An agency rule, in addition to being subject to congressional oversight, may also 404 be subject to a delayedeffective date if the rule isa “major rule.” The NCUA does not believe 33 Pub. L. 105–277, 112 Stat. 2681 (1998). 34 5 U.S.C. 551.

405 this rule is a “majorrule” within the meaning of the relevant sections of SBREFA. As required 406 by SBREFA, the NCUAwill submit this final rule to OMB forit to determine if the final rule is 407 a “major rule” for purposesof SBREFA. The NCUA also will file appropriate reports with 408 Congress and the Government Accountability Office so thisrule may be reviewed. 409 List of Subjects 410 12 CFR part 700 411 Credit unions. 412 12 CFR part 701 413 Credit unions. Insurance. Reporting and recordkeeping requirements. 414 12 CFR part 703 415 Credit unions. Investments. Reporting and recordkeeping requirements. 416 12 CFR part 704 417 Corporate Credit Unions, PromptCorrective Action 418 12 CFR part 713 419 Bonds. Credit unions.Insurance.

420 By the National Credit Union Administration Board on OctoberXX, 2021 421421 422 Melane Conyers-Ausbrooks 423 Secretary of the Board 424 For the reasonsdiscussed in the preamble, the Board amends 12 CFRparts 700, 701, 703, 425 704, and 713 as follows: 426426

427 PART 700 — DEFINTIONS 428 1. The authority citationfor part 700 continues to read as follows: 429 Authority: 12 U.S.C. 1752, 1757(6), 1766. 430 § 700.2 [Amended] 431 2. In § 700.2,amend the definition of “troubled condition”, by removing the word, 432 “CAMEL”, and adding, in its place, the word, “CAMELS”,wherever it appears. 433 PART 701 — ORGANIZATION AND OPERATION OF FEDERAL CREDITUNIONS 434 3. The authority citation for part 701 continues to read as follows: 435 Authority: 12 U.S.C.1752(5), 1755, 1756, 1757, 1758, 1759, 1761a, 1761b, 1766, 436 1767, 1782, 1784, 1786, 1787, 1788, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. 437 Section 701.31 is also authorized by 15 U.S.C. 1601 etseq.; 42 U.S.C.1981 and 3601-3610. 438 Section 701.35 is also authorized by 42 U.S.C.4311-4312. 439 § 701.14 [Amended] 440 4. Amend § 701.14(b) by removingthe word, “CAMEL”,and adding, in its place, the 441 word, “CAMELS”, wherever it appears.

442 § 701.23 [Amended] 443 5. Amend § 701.23(b)(2) by removing the word, “CAMEL”,and adding, in its place,the 444 word, “CAMELS.” 445 PART 703 — INVESTMENT AND DEPOSIT ACTIVITIES 446 6. The authority citation for part 703 continues to read as follows: 447 Authority: 12U.S.C. 1757(7), 1757(8), and 1757(15). 448 § 703.13 [Amended] 449 7. Amend § 703.13(d)(3)(iii) by removing the word, “CAMEL”, and adding, in its place, 450 the word, “CAMELS.” 451 § 703.14 [Amended] 452 8. Amend § 703.14 by removingthe word, “CAMEL”,and adding, in its place, the word, 453 “CAMELS”,wherever it appears. 454 PART 704 — CORPORATE CREDIT UNIONS 455 9. The authority citationfor part 704 continues to read as follows: 456 Authority: 12 U.S.C. 1766(a), 1781, 1789.

457 § 704.4 [Amended]

458 10. Amend § 704.4(d)(3)(ii) by removing the word, “CAMEL”, and adding, in its place,

459 the word, “CAMELS.”



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

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

464 § 713.6 [Amended]

465 12. Amend § 713.6 by removingthe word, “CAMEL”,and adding, in its place, the word,

466 “CAMELS”,wherever it appears.


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