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Industry Letter

Industry Letter  Credit union sensitivity to market risk

Date: 12/18/2014
Referenced Sources: NCUA

To the Chief Executive Officer of the Credit Union Addressed:

The purpose of this letter is to notify you of an upcoming change in the manner in which the Division of Banks (Division) will be assigning ratings to Massachusetts state-chartered credit unions as part of its Risk Management examinations.  Specifically, the Division will be assessing “Sensitivity to Market Risk” within its own component rating (“S”) rather than as a factor within the “Liquidity” or “L” component rating.  As a result, the rating system’s acronym will change to CAMELS.  Sensitivity to Market Risk is generally described as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect earnings and/or net worth.  For most institutions the analysis is centered in interest rate risk.  This change will go into effect for all examinations commencing after April 1, 2015.

To date, the Division has utilized the NCUA’s method of assigning five component ratings to credit unions under the CAMEL rating system.  This includes combining the assessments of Liquidity and Sensitivity to Market Risk into the single “L” component.  Nearly two decades ago, the Federal Financial Institutions Examination Council (FFIEC), a formal interagency body empowered to prescribe uniform principles and standards for examinations, added a sixth component to its Uniform Financial Institution Rating System (UFIRS) to incorporate Sensitivity to Market Risk.  Accordingly, the analysis of a bank’s sensitivity to market risk is performed separately from the analysis of liquidity, resulting in an “S” component and a modification of the CAMEL acronym to CAMELS.  Further information relative to the UFIRS Sensitivity rating can be found at the links below.

Division examiners have rated the “L” and “S” components individually since 1997 when examining banks and this approach has served both the banks and regulators well over this period.  As the analyses of liquidity and sensitivity to market risk each grow in complexity and importance, assigning each component its own rating is appropriate and more transparent.  In fact, the Division notes that many bank examination reports reflect differing “L” and “S” ratings based on the strengths or weaknesses found within each of these components.

Please note that the implementation of this change will not increase burden for your staff or result in any additional examiner expectations.  It is also important to point out that at least five state credit union regulators have already adopted the FFIEC’s CAMELS rating system for credit union examinations, while others are considering it.  In addition, the NCUA has expressed an interest in adopting the “S” rating but considers it a longer term goal given the extensive program changes required.  Nevertheless, it is the Division’s position that the separation of these component ratings will provide more clarity to the examination process.

Should you have any questions relative to this implementation, please contact Deputy Commissioner James A. Barrett at 617-956-1500 ext. 401 or james.a.barrett@state.ma.us.


David J. Cotney
Commissioner of Banks



L.J. Blankenberger, Regional Director, National Credit Union Administration

Mark A. Treichel, Executive Director, National Credit Union Administration

Table of Contents

Further information about UFIRS can be found at: https://www.fdic.gov/news/news/financial/1996/fil96105a.html.

Commonly asked questions about the Sensitivity rating can be found at: https://www.fdic.gov/news/inactive-financial-institution-letters/1997/fil9717.html.

Referenced Sources:

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