CAMEL Exam Matrix May Be on NCUA's Chopping Block
ALEXANDRIA, Va. -- NCUA is looking at whether the infamous CAMEL Matrix has outlived its usefulness and should be tossed in the circular file.
The CAMEL Matrix used by NCUA and some state regulators is a set of basic ratio guidelines to help examiners determine the proper CAMEL ratings for credit unions. It is also shared with credit unions to help them know what to expect from an examination.
However, the matrix has long been criticized as out-dated and "one-size-fits-all." Just over a year ago, NCUA issued a Letter to Federal Credit Unions 06-FCU-04 to share with credit unions that the agency executives are working to train examiners not to rely strictly on the matrix. In particular, with earnings waning at credit unions over the last couple of years, the Supervisory Letter to exam staff, attached to the one shared with federal credit unions, emphasized that the 1% return on assets was intended as guidance for a CAMEL 1 rating--the highest level--but not an automatic requirement.
"The determination of an adequate earnings level is a complex facet of credit union supervision. Lower earnings are being observed nation-wide," last year's Supervisory Letter 06-01, signed by NCUA Director of Examination & Insurance Dave Marquis, stated. "This trend is the result of rising interest rates, a flat yield curve, and some credit unions incurring costs to position themselves strategically. There is no simple metric for determining what a credit union's retained earnings level should be. However, as emphasized in NCUA Letter to Credit Unions 03-CU-04 (March 2003), CAMEL Rating System, CAMEL ratings are not automatically determined by matrix ratios. Striving for an arbitrary one percent Return on Average Assets just to achieve a CAMEL 1 rating based on the CAMEL matrix is not an acceptable argument, especially in the current economy, for a well-capitalized credit union. Each credit union's earnings level must be evaluated relative to net worth needs, financial and operational risk exposures, the current economic climate, and the institution's strategic plans."
Ultimately, strict adherence to the CAMEL Matrix ratios could "undermine a credit union's ability to achieve long-term success" and "attempting to bolster earnings in the current environment is very
likely to involve strategies that necessitate excessive risk-taking."
NCUA has been working with NASCUS and met with the credit union trade groups to discuss the possible elimination of the CAMEL Matrix. The agency said it will continue to use the CAMEL internal rating system and is confining its review strictly to the matrix, an optional examiner tool.
Some state examiners still use the matrix while others do not, according to NASCUS President/CEO Mary Martha Fortney. "We've connected with state regulators and are gathering their comments, which we will share with NCUA," she said.
CUNA Senior Vice President and Deputy General Counsel Mary Dunn called NCUA's move "a really important development." CUNA's Examination & Supervision Subcommittee was meeting last week via conference call and planned to discuss the matter. "We're going to be talking further with senior staff at NCUA about what the changes they're envisioning and what the significance of those changes are."
"We obviously look forward to working with the agency and considering anything that they come out with," NAFCU Senior Counsel and Director of Regulatory Affairs Carrie Hunt stated.
"The Matrix currently consists of static ratio benchmarks," according to an NCUA statement on the matter. "CAMEL is not an arithmetic score or a comparison to other credit unions of similar asset sizes. An examiner's overall assessment of the credit union is based on numerous factors." NCUA cited Letter to Credit Unions Number 03-CU-04, stating, "CAMEL is not intended to be used as a report card but as an internal tool to measure risk and allocate resource for supervision purposes."