WASHINGTON — America’s Credit Unions is backing separate proposals to revise the CAMELS examination rating system and expand the use of hedge accounting, arguing the changes would better align regulatory and accounting treatment with the actual risks facing credit unions.
In two comment letters dated Aug. 17, the trade group supported proposals from the Federal Financial Institutions Examination Council and the Financial Accounting Standards Board. America’s Credit Unions represents credit unions serving more than 146 million members nationwide.
In its letter to the FFIEC, America’s Credit Unions strongly supported proposed revisions to the Uniform Financial Institutions Rating System, commonly known as the CAMELS rating system, saying ratings should be based on an institution’s financial condition and material safety and soundness risks rather than examiner preferences, documentation issues or other process concerns that do not create significant risk.
Would Reduce ‘Special Weight’ Given
The organization said the proposed changes would reduce the special weight given to the Management component of CAMELS, limit the effect of specialty examination findings and eliminate references to reputation risk.
America’s Credit Unions said it has previously raised concerns that the Management component can become a “catch-all” for supervisory issues that do not represent material safety and soundness risks. It said the proposal addresses those concerns but urged regulators to provide additional clarification to promote consistent treatment among examiners.
The Recommendations
Among its recommendations, America’s Credit Unions said the final CAMELS framework should:
- Eliminate the requirement that the Management component receive “special consideration” when determining a credit union’s composite rating and require a clear explanation when Management concerns are the primary reason for a downgrade.
- Generally require material financial risk before risk-management, internal-control or board-oversight weaknesses can result in a Management rating of 3 or worse. Minor, technical or promptly corrected compliance issues should not trigger such a downgrade.
- Limit the effect of specialty reviews involving areas such as Bank Secrecy Act and anti-money laundering compliance, consumer compliance and information systems unless findings create material financial risk, affect the institution’s overall financial condition or represent significant legal or regulatory noncompliance.
- Ensure composite ratings of 3 or worse reflect meaningful supervisory concerns rather than immaterial process deficiencies and require examiners to explain ratings that are lower than the institution’s individual CAMELS components would appear to support.
- Prevent examiners from “double-counting” the same issue across multiple CAMELS components in a way that makes a problem appear more serious or leads to a lower composite rating.
- Require additional scrutiny when examiners rely on factors not specifically listed in the CAMELS framework and provide credit union-specific examples of when such factors may justify a rating change.
- Account for differences in credit union size, complexity and structure, including smaller institutions that rely on volunteer boards and limited staffs.
Role of CUBMA
The group also pointed to the recently enacted Credit Union Board Modernization Act as increasing the importance of consistent CAMELS ratings. Under the law, qualifying federal credit unions with composite and Management ratings of 1 or 2 may hold six board meetings annually, while credit unions rated 3, 4 or 5 must continue meeting monthly.
That means a downgrade from a 2 to a 3 can now have governance and operational consequences in addition to supervisory implications, the group said.
America’s Credit Unions said implementation will be critical and called for examiner guidance, training and updates to the National Credit Union Administration’s Examiner’s Guide. It also urged the NCUA to work with state regulators to ensure the revised framework is applied consistently to federally insured, state-chartered credit unions
ACU Also Backs Hedge Accounting Changes
In a separate letter to the Financial Accounting Standards Board, America’s Credit Unions supported proposed amendments to accounting rules covering derivatives and hedging.
Federally insured credit unions with more than $500 million in assets are required to prepare financial statements under generally accepted accounting principles, and many credit unions use interest-rate derivatives to manage their balance sheets, the group said.
America’s Credit Unions said the three issues addressed by FASB’s proposal would eliminate restrictions in the current hedge-accounting model that can prevent financial statements from reflecting how depository institutions actually manage interest-rate and foreign-currency risk.
Under existing guidance, ACU said, a credit union can use a derivative to reduce a legitimate economic exposure but still fail to qualify for hedge accounting. In that situation, changes in the derivative’s fair value are recognized in earnings without a corresponding adjustment to the position being hedged.
America’s Credit Unions said that accounting mismatch can discourage institutions from using hedge accounting even when the derivatives are part of effective risk-management strategies.
The proposed amendments would allow more of those strategies to qualify for hedge accounting, allowing reported financial results to more closely reflect the economics of the underlying transactions, the REsw group said.
