CAMEL Ratings Morph Under Weight of Financial Market Turmoil
That may have been the right answer back then and even today, but how times have changed. Given the tumultuous financial landscape, ensuring safety and soundness at the management level has shot to the top of the list, said Alonzo Swann, NCUA Region III director, told attendees at the African American Credit Union Coalition's annual meeting.
The rest of Swann's top five list is the liquidity part of asset-liability management, asset quality, earnings and capital coming in dead last. With that said, capital, asset quality, management, earnings and liquidity or overall CAMEL ratings are probably not the most pressing concern for credit unions right now. Navigating in a troubled economy takes precedence, he believes.
"There are a lot of credit unions that used to manage to 1% ROA," Swann said. "You should manage to the best interest of your members."
Swann oversees exam activity for more than 1,800 federally insured credit unions in Alabama, Florida, Georgia, Indiana, Kentucky, Mississippi, North Carolina, Ohio, Puerto Rick, South Carolina, Tennessee and the Virgin Islands. Florida in the particular has been hammered with real estate loan losses. Some credit unions that previously saw examiners there once every 18 months are now visited every three months.
"We've got a lot of red ink bleeding right now. There are credit unions with million dollar losses, mostly in Florida," Swann said.
Credit unions in troubled markets can expect more visits from examiners, Swann said, adding NCUA is "reallocating resources as we speak" to provide additional guidance. More scrutiny is certainly necessary given the dips in the National Credit Union Share Insurance Fund. If the industry adds up the total hits to the fund over the last 15 years, 2007's withdrawals were more, he pointed out. Over that same 15-year time period, the focus in Region III had been on ensuring the smaller credit unions were up to par. That has since shifted to helping out larger credit unions again, mainly in Florida, and other localized spots.
NCUA modified the CAMEL rating system by eliminating the matrix that measured financial ratio results against benchmarks for capital adequacy, asset quality and earnings, according to the agency's December 2007 07-CU-12 supervisory letter. The focus now is on CAMEL evaluation on risk consistent with NCUA's risk-focused exam program.
Swann said changes to the rating system will be minimal, but even so, NCUA has been prepping for the adjustments for some time. For one, examiners always had the judgment to change the matrix based on global conditions. Swann recalled the early days of his career in Gary, Ind., when examiners used the "early warning system" to spot potentially troubled credit unions.
"Using peer averages wasn't a good idea, because in the 1980s, thrifts were tanking," Swann said. "The ratios were so bad for thrifts that being insolvent was good."
In the past, numbers were crunched to reveal trends and explore management components to see where a credit union was headed. Today, more emphasis is on forward projection. Still, when looking at asset quality, "the biggest determinant is past performance."
With the changes to CAMEL, Swann said he can not say enough about liquidity.
"If everything happening now happens again in ten years, liquidity may be a problem" he warned. "If we don't come out of this with a lot of shares, there could be a problem."
For members, CAMEL may as well be a desert animal that can go for long periods of time without water.
"I'm a member of three credit unions. When I walk in I want to see how fast the service is and if I'm getting the best returns on my savings," Swann said. "Members could care less about CAMEL ratings."
A CEO at Swann's session questioned an examiner's recent questions about reputation risk regarding the credit union's marketing plans.
"Reputation risk is in the eye of the beholder," Swann responded, later saying in another part of his talk that examiners do not have a component to evaluate member service.
"That's your job," he reminded the attendees.
Swann acknowledged that a retraining of examiners aims to help them make better judgment calls. He also said credit unions are being held to the same standards as banks and thrifts. They too have to adhere to CAMEL with an added "s"--"sensitivity," he said.