The OIG recommended the NCUA add an S rating for market risk sensitivity and revise the L rating to reflect only liquidity factors. Under its current structure, the acronym CAMEL is derived from the following components: [C]apital Adequacy, [A]sset Quality, [M]anagement, [E]arnings and [L]iquidity/Asset/Liability Management. The audit was conducted through NCUA staff interviews, and reviews of NCUA guidance, policies, procedures and other interest rate risk information. Additionally, the OIG selected a credit union from each of the NCUA's five regions and analyzed the corresponding examination and supervision reports and related documents.

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

Jim Blaine, president/CEO of the Raleigh, N.C.-based, $31 billion State Employees' Credit Union, told CU Times IRR is not a new concept for the NCUA or other financial institutions, since it was adopted by banking agencies almost 20 years ago.

“The measurement of interest rate risk has been practiced by credit unions and the NCUA for decades, so it's not a new idea,” he said.

Blaine added increasing the importance of the L component “is exactly the right move.” He explained liquidity is the component that “brings organizations down – not capital, not interest rate risk.”

The NCUA agreed with the OIG's recommendations in a letter contained within the report. NCUA Executive Director Mark Treichel said if the board approves the regulatory changes, the regulator will target the final implementation of the recommendation by the end of 2018. He added the changes required to meet the recommendations “will be complex.”

The NCUA is moving more toward adopting standards and processes that are similar to those practiced by other federal regulators, and this move would be in line with that effort, according to Blaine. The FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System began using the CAMELS rating system on Jan. 1, 1997, after the system was revised in 1996 by the Federal Financial Institutions Examination Council to add an S. The NCUA adopted the CAMEL rating system in October 1987.

However, if the NCUA lines up with other regulators, the endgame could be problematic for credit unions. Should the NCUA start mirroring other regulators by adapting “a series of banking rules for credit unions, then that will impair the credit unions' effort to serve,” Blaine stated.

NAFCU Director of Regulatory Affairs Alicia Nealon told CU Times the trade group is examining how the addition of S to the CAMEL rating system will impact its members. “NAFCU has long maintained that (the) NCUA should address interest rate risk on the exam side, rather than through additional regulation,” she said.

Yet the devil is in the details, according to Blaine. One of the factors that concerns credit unions is the differing perception between a regulator and the financial institution it oversees. He added that a strong point of friction between the NCUA and credit unions is the determination of the appropriate level of risk at an institution.

“Since there are no specific rules in interest rate risk, there is not an agreed upon formula or standard template,” he added. “That's where you get all sorts of argument back and forth between credit unions and the regulator.”

Bill Hampel, chief policy officer for CUNA, told CU Times that the trade group was aware the NCUA has been developing new examination tools to assess interest rate risk.

“So long as adding an S to CAMEL simply highlights the incorporation of those tools into the process, without adding additional exam requirements beyond those tools, doing so would not be harmful,” Hampel said.

Still, the question of why the recommendations are coming from the OIG now – almost 20 years later – lingers.

“It is a little unusual that this originated out of the blue with the OIG,” Blaine said. “It does look like a political move within the organization to give it a basis for argument that they must proceed and do something.”

The NCUA has lagged behind other regulators that moved forward with interest rate risk in 1997. Now that it's been criticized by its auditor, the agency can use the OIG's recommendations to step closer in line with other regulators.

However, some warned the agency should exercise caution. Blaine cited the corporate credit union collapses in 2008 and 2009 as a looming concern for today's credit unions. Back then, the NCUA's capital markets division included on-site IRR experts, Blaine explained, who oversaw institutions that still went “belly up” after being watched daily.

He added, “There's some concern, not only about how interest rate risk is going to be measured by the NCUA, but the degree of expertise they have in house to really do that. It's critical for credit unions how that's measured.”

The OIG report also identified that NCUA Regional Capital Market Specialists are pivotal in identifying credit unions with elevated IRR. These specialists perform annual assessments to help prioritize a credit union's workload for the upcoming year. After reviewing various metrics, the specialists assign a quantitative risk rating and conduct a review of examination contacts. However, these assessments vary by region, and some take into account metrics that are not measured across all regions. These include balloon or hybrid loans with interest rates that are due to readjust during assessments of real estate concentrations because they carry risks similar to those of fixed rate loans.

In addition to Regional Capital Market Specialists, the report found regional Divisions of Supervision also assess and measure IRR. Further, examiners conduct a preliminary risk assessment that includes a review of IRR.

“It's probably a positive step forward, but the devil is always in the details on implementation,” Blaine concluded.