May 24, 2016



The Office of Credit Unions (OCU) has been using the CAMEL rating system in accordance with the National Credit Union Administration (NCUA) Letter to Credit Unions, No. 07-CU-12, CAMEL Rating System. CAMEL is based on the Federal Financial Institutions Examination Council's (FFIEC) Uniform Financial Institutions Rating System (UFIRS) commonly referred to as CAMEL. The FFIEC developed UFIRS in 1979 to assess risk on a system wide basis. NCUA adopted CAMEL in October 1987. In 1997, a revision to the UFIRS included the addition of a sixth component addressing
sensitivity to market risks. NCUA has not adopted the "Sensitivity to Market Risk" or "S" component.

Effective July 1, 2016, the Office of Credit Union will begin using the CAMEL component "S" rating in examinations. OCU believes the implementation of the "S" rating is prudent at this time. It is being implemented to specifically address the degree to which interest rate changes can impact a credit union's earnings or net worth. This component also focuses on a credit union's ability to measure, monitor and manage its interest rate risk exposure. The utilization of the "S" component also recognizes the increasing balance sheet complexity in Wisconsin credit unions and ensures improved assessment and supervisory communication regarding interest rate risk and liquidity risk.

The use of the "S" component is not intended to add to the regulatory burden or require additional policies or procedures. Supervision expectations for the management of market risk remain unchanged. The quality of management systems and expertise of management must be commensurate with risk exposure. The addition of the "S" component is, again, intended to promote and complement efficient examination processes and meant to ensure an appropriate dialogue between examiners and credit union management relative to this important risk area.

The attachment documents the CAMELS system. It will be utilized by examiners and combines NCUA's CAMEL Rating System and the UFIRS. The Liquidity "L" and Sensitivity to Market Risk "S" Components are adopted from UFIRS. The other components are adopted from Appendix A —NCUA's CAMEL Rating System (Letter No. 07-CU-12).

OCU will continue to only disclose the overall component rating. The individual component ratings will not be disclosed but will provide valuable information to the OCU for assessing risk and allocating resources based on the safety and soundness of credit unions. Ratings are only assigned at a full examination. Only in rare circumstances is a rating changed between examinations.

Because the NCUA has not adopted the use of the "S" CAMEL component rating, the OCU and NCUA have agreed to a workaround for reporting the state CAMELS rating to NCUA in the Automated Integrated Regulatory Examination Software (AIRES). The workaround is the same that NCUA uses with other states that have adopted the CAMELS rating. Regarding the component ratings for "L" and "S", each will now be rated separately. Asset-liability management will be mainly factored into the "L" component rating. The lower of the "L" or "S" rating will be input in AIRES for the "L" component rating. For example, if "S" is rated a "2" and "L" is rated a "3", then "3" will be input into the "L" AIRES component rating. Again, the attachment explains the components and ratings.

Questions regarding this letter should be directed to the Office of Credit Unions at (608) 261-9543. 

Kim Santos


The CAMELS rating system is based upon an evaluation of six critical elements of a credit union's operations: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. CAMELS is designed to take into account and reflect all significant financial, operational, and management factors examiners assess in their evaluation of a credit union's performance and risk profile.

Examiners rate credit unions based on their assessment of the individual credit union rather than against peer averages. Peer averages do not necessarily reflect credit unions are operated in a safe and sound manner. The CAMELS ratings should reflect the condition of the credit union regardless of peer performance. Examiners are expected to use their professional judgment and consider both qualitative and quantitative factors when analyzing a credit union's performance. Since numbers are often lagging indicators of a credit union's condition, the examiner must also conduct a qualitative analysis of current and projected operations when assigning CAMELS ratings.

Part of the examiner's qualitative analysis includes an assessment of the credit union's risk management program. In Risk Focused Examinations (RFEs), examiners assess the amount and direction of risk exposure in seven categories: Credit, Interest Rate, Liquidity, Transaction, Compliance, Reputation, and Strategic (seven risk categories) and determine how the nature and extent of these risks affect one or more CAMELS components.

Although the CAMELS composite rating should normally bear a close relationship to the component ratings, the examiner does not derive the composite rating solely by computing an arithmetic average of the component ratings. Examiners consider the interrelationships between CAMELS components when assigning the overall rating. Some of the evaluation factors are reiterated under one or more of the components to reinforce the interrelationships between components. The following two sections contain the component and composite ratings.

Rating 1 - Credit unions in this group are sound in every respect and generally have components rated 1 and 2. Any weaknesses are minor and can be handled in a routine manner by the board of directors and management. These credit unions are the most capable of withstanding unpredictable business conditions and are resistant to outside influences such as economic instability in their trade area. These credit unions are in substantial compliance with laws and regulations. As a result, they exhibit sound performance and risk management practices relative to the credit union's size, complexity, and risk profile, and give no cause for supervisory concern.

Rating 2 — Credit unions in this group are fundamentally sound. For a credit union to receive this rating, generally no component rating should be more severe than a 3. Only moderate weaknesses are present and are well within the board of directors' and management's capabilities and willingness to correct. These credit unions are stable and are capable of withstanding business fluctuations. These credit unions are in substantial compliance with laws and regulations. Overall risk management practices are satisfactory relative to the credit union's size, complexity, and risk profile. There are no material supervisory concerns and, as a result, the supervisory response is informal and limited.

Rating 3 - Credit unions in this group exhibit some degree of supervisory concern in one or more of the component areas. These credit unions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Credit unions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those rated a composite 1 or 2. Additionally, these credit unions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the credit union's size, complexity, and risk profile. These credit unions require more than normal supervision which may include enforcement actions. Failure appears unlikely, however, given overall strength and financial capacity of these credit unions.

Rating 4 - Credit unions in this group generally exhibit unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Credit unions in this group generally are not capable of withstanding business fluctuations.  There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the credit union's size, complexity, and risk profile. Close supervisory attention is required, which means, in most cases, enforcement action is necessary to address the problems. Credit unions in the group pose a risk to the National Credit Union Share Insurance Fund (NCUSIF). Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved.

Rating 5 — Credit unions in this group exhibit extremely unsafe and unsound practices and conditions; exhibit a critically deficient performance; often contain inadequate risk management practices relative to the credit union's size, complexity, and risk profile; and are of the greatest supervisory concern. The volume and severity of problems are beyond management's ability or willingness to control or correct. Immediate outside financial or other assistance is needed in order for the credit union to be viable. Ongoing supervisory attention is necessary. Credit unions in this group pose a significant risk to the NCUSIF and failure is highly probable.