I recently attended the NAFCU Chief Executive Officers Conference in Savannah, Ga., and the last speaker on the agenda was NCUA General Counsel Robert Fenner. Fenner quoted a statistic on the breakdown of CAMEL ratings among credit unions, which caught my attention. He said 5% of credit unions are rated 4 or 5, 15% are rated 3, and the majority-80% -are either a 1 or 2. Now don't shoot the messenger, but I find it hard to believe so many of us are that good.
One thing that amazes me about the CAMEL ratings is that being rated a 3 seems to now be the kiss of death. At one of the NCUA's corporate town hall meetings, Chairman Debbie Matz said special attention was being put on CAMEL 3 credit unions. If this was meant in the context of making sure they don't fall to 4 or 5, it makes sense. But if it means being a 3 is bad, that is a shift from past policy. Under Regulation 742, you can apply for the regflex designation if you receive a CAMEL 3 rating and are classified as well-capitalized. We need to have a clear understanding on this because, earlier, former NCUA Board Member Rodney Hood declared CAMEL dead. Yet, now it appears to have come back in zombie-like form.
Ever since the financial meltdown began in 2007, the credit union mantra has been, "we did not cause this problem." However, since the end of Glass-Steagall in 1999 let loose the dogs of free markets, credit unions have participated in the risk-taking run.
Credit unions and the NCUA became enamored with our high net-worth numbers and regflex was born. Next, we went from having annual examinations to one every 18 months, and then the examination became what was called risk-focused. Only areas that were considered risky were reviewed, and more weight was placed on the external CPA audits. It makes one wonder how reliable the CAMEL 1 and 2 ratings are when you look back. We may not have caused the current problems, but as an industry, we certainly have problems of our own to deal with.
Now, it may be comforting to place all of the blame on the NCUA, but let's admit that we credit unions took to regflex like a duck to water. Branch expansions exploded with release from the 5% fixed-assets rule. Further, personal guarantees on member business loans no longer got in the way. And there was no reason to worry about stress-testing investments because we qualified for regflex. Our net worth was so large we could handle any risk. Alas, if we look at the credit union closures taking place, we'll find all kinds of risky behavior that may not have taken place prior to regflex.
It's getting to be a tough regulatory environment out there, and that's a concern. I am hopeful that our regulators will proceed with caution and that we'll work together to ensure credit unions' survival.
Main Street Financial FCU
Denham Springs, La.