WASHINGTON — The Defense Credit Union Council is backing proposed changes to the federal CAMELS rating system, saying the revisions would focus examinations more closely on financial risks that could materially affect a credit union’s safety and soundness.
In comments filed with the Federal Financial Institutions Examination Council, DCUC said proposed revisions to the Uniform Financial Institutions Rating System, commonly known as CAMELS, would better align regulatory ratings with an institution’s financial condition and risk profile.
The trade group also praised the FFIEC’s proposed emphasis on material financial risks rather than process-related deficiencies that do not significantly affect safety and soundness.
Changes Getting Support
Among the proposed changes supported by DCUC are:
- Removing the “special consideration” given to the Management component when determining an institution’s overall composite rating.
- Revising factors used to evaluate management to focus on the most significant aspects of risk management.
- Removing management evaluation factors related to management depth and succession, responsiveness to auditor and supervisory recommendations, and demonstrated willingness to serve legitimate community banking needs.
- Establishing a material financial risk threshold for assigning Management ratings of 3 or worse based on risk management weaknesses.
- Clarifying that findings from specialty reviews should affect CAMELS ratings only when they reflect material financial risks.
Should Improve Consistency
DCUC said the proposed changes could make examinations more consistent and predictable by providing credit unions with clearer information about how regulators determine ratings.
“Under the proposal, [ratings of 3 or worse] generally would be assigned when risk management weaknesses result in material financial risk to the institution,” Jason Stverak, DCUC’s chief advocacy officer, said in the group’s comments. “Institutions that have unreliable financial or regulatory reporting, have failed to safeguard assets, or are in significant noncompliance with law or regulation may also be assigned a Management component rating of 3 or worse.”
Stverak said the approach would be particularly important for institutions serving members of the military and veterans.
“For credit unions serving military and veteran communities, supervisory resources are better directed toward risks that could materially affect an institution’s financial condition and its ability to serve its members than toward deficiencies that have little bearing on safety and soundness,” he said.
Additional Recommendation
DCUC also recommended that regulators expressly incorporate emerging technology risks into the Management component of CAMELS.
The group said examiners should consider board and management oversight of cybersecurity, artificial intelligence governance, third-party technology risks and data governance. DCUC also supported the proposed revisions to CAMELS composite rating definitions.
The trade group welcomed a proposal to replace broad language involving risk identification with more specific evaluation factors related to risk management. Greater specificity, DCUC said, would give credit unions clearer expectations and help examiners apply component ratings more consistently.
‘But Not Limited To’ Language Supported
DCUC also supported removing “but not limited to” language from individual CAMELS component descriptions. Under the proposal, a general provision applicable to all components would allow examiners to consider additional factors when warranted by exceptional circumstances or evolving business practices.
The Defense Council said requiring examiners to document why they considered additional factors would improve transparency and predictability in the examination process.
