Disclose the Score: Take the CAMEL Through the Eye of a Needle
(Editor's note: This column and the accompanying column by Bill Brooks present differing views on whether the NCUA should disclose CAMEL scores.)
I am surprised that the NCUA does not support releasing exam findings. That position completely contradicts the unique, member-owned nature of credit unions. The NCUA's position negates one of the key controls built into the credit union's organization structure.
Member-owners have a duty to elect the Board of Directors. The members have to have some basis for evaluating the board's performance and on the basis of that performance hold the board accountable.
So how is that working? Members don't attend annual meetings, members don't read the annual reports, and members don't elect the board because the board members are nominated without opposition. Members don't engage in governance and their access to information is limited by their failure to engage in the governance process.
I believe members would react if they were given CAMEL ratings by the regulator. I believe members would react if regulators would share with them the reasons behind the CAMEL ratings. Disclosing CAMEL ratings would give members a basis for evaluating board and management. Disclosing CAMEL ratings would also make the NCUA accountable for the ratings in a way that it is not accountable today.
The “M” in CAMEL has long been a neglected part of the rating. Members judge the effectiveness of management in the way they perceive the credit union meets their needs. That rating is delivered in the form of member growth, share growth, loan growth and the financial performance of the credit union in general.
Member satisfaction levels are a direct result of the quality of management. The NCUA does not measure member satisfaction. NCUA's evaluation of M is usually a derived result from how successful the credit union performs in CAMEL ratings. NCUA does not measure how engaged members are.
That is a mistake because the degree of member engagement indicates the degree to which members are paying attention to the credit union's financial performance and holding board and management accountable. To the extent members are not involved the entire oversight depends solely on the NCUA.
The latest financial crisis proves that both bank and credit union regulators were unable to prevent catastrophic failures – despite what appeared in hindsight to be clear warning signs (in fact the NCUA's lawsuit against the WesCorp Board and management shows that the agency believes the warning signs were clear and were not heeded). Therefore it is critical that we look for new ways to prevent disaster.
Bill Cheney testified to Congress that credit unions have a unique structure that by itself qualifies credit unions for tax exemption. Why not let that unique democratic structure do what the Credit Union Act and the founders of credit unions intended – engage members in the governance and oversight of credit unions? Let them see the CAMEL rating and the reasons for that rating.
In the end the members of Telesis CU and other credit union failures find out what the facts are. But then of course it is too late. It is too late to save the capital, too late to avoid the insurance fund losses, too late to stop the board from giving management a multi-million dollar golden parachute for their great performance that led to the disaster, and too late to avoid a merger.
Thank goodness we have a combined regulatory agency and insurance fund that can arrange mergers and sweep the whole mess under the rug and charge any losses to the insurance fund.
So hurray for the NCUA standing up for members acting like owners and giving them the facts before the disaster. Better to wait until the horse is out of the barn before we close the door.
Jim Blaine may introduce himself as a representative of a large troubled credit union but he is also a prophet calling for reform that will prevent large troubled credit unions and hold accountable boards and management of credit unions as well as the regulators that rate those credit unions.
I know at least five reasons not to disclose CAMEL ratings. My credit union lost $23 million when WesCorp failed so I can say I have 23 million reasons to want CAMEL ratings disclosed.
Henry Wirz is president/CEO of the $1.9 billion SAFE Credit Union in North Highlands, Calif.