The Office of Inspector General recommended adding an S category tothe NCUA'sCAMEL rating system to more effectively monitor interestrate risk, according to a Nov. 13 report.

The OIG conducted an audit into the NCUA's IRR policy todetermine if its policy and procedures reduce IRR. The OIG alsostudied what actions the agency has taken or planned to take inorder to identify and address credit unions with IRR concerns.

In the report, the OIG concluded that the NCUA's CAMEL ratingsystem may not be effectively capturing IRR when assigning thecomposite rating to a credit union. The report stated that in theNCUA's assessment of sensitivity to market risk under the L in itsCAMEL rating may “understate or obscure instances of high IRRexposure in a credit union.”

Download and read the complete OIG report here.

The OIG determined the NCUA took steps to identify and addresscredit unions with interest rate risk concerns, but stated theaddition of an S rating would improve the agency's ability toaccurately measure and monitor interest rate risk by separatelyassessing a credit union's sensitivity to market risk.

The OIG recommended that the NCUA add an S rating for marketrisk sensitivity and revise the L rating to reflect only liquidityfactors.

Under its current structure, the acronym CAMEL is derived fromthe following components: [C]apital Adequacy, [A]sset Quality,[M]anagement, [E]arnings and [L]iquidity/Asset/LiabilityManagement.

The audit was conducted by interviewing NCUA staff, reviewingNCUA guidance, policies, procedures and other interest rate riskinformation. Additionally, the OIG selected a credit union fromeach of the NCUA's five regions and analyzed the correspondingexamination and supervision reports and related documents.

Regional staff and examiners play essential roles in determiningwhich credit unions have elevated IRR and assessing and addressingIRR concerns. Additionally, the NCUA's IRR working group formed bythe agency is refining the process needed to developexamination-based IRR assessment tools, according to the report. Asa result, the OIG said it will revisit this objective later,allowing the agency time to develop the process.

The NCUA adopted the CAMEL rating system in October 1987;however, the system was revised by the Federal FinancialInstitutions Examination Council to add an S in 1996. The FDIC, theOCC and the Board of Governors of the Federal Reserve System beganusing the CAMELS rating system on Jan. 1, 1997.