CFO Focus: A timely reminder about CAMELS
Be sure interest rate analysis provides actionable decision information focused on the right elements.
The National Credit Union Administration’s announcement of adding “S” to the CAMEL rating system, separating market sensitivity from liquidity, didn’t cause much fanfare. Ratings for individual credit unions are not expected to change much, but the timing is incredibly relevant.
The “S” is designed to put a spotlight on interest rate risk. An institution’s management of IRR is important for balancing risks and earnings opportunities in any environment, but the importance has increased with the extended low-rate environment, loan demand dominated by mortgages, a surplus of investments that earn little without lengthening the portfolio, squeezed margins and market rates anticipated to rise.
Beyond satisfying examiners, the focus should be on making the best decisions possible to keep your institution competitive, profitable, and safe and sound. The key is to be sure the analysis and quantification of IRR provide actionable decision information that is focused on the right elements—realistic impacts on earnings and net worth in a changing environment.
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