The number of credit unions with adverse CAMELS ratings is on the rise, leaving the industry's top regulator concerned about the safety and soundness.
The total assets of institutions with a CAMELS rating of 3 was $131.7 billion in the third quarter of 2023, a 45% increase sequentially, according to National Credit Union Administration (NCUA) Chairman Todd Harper. Moreover, the number of credit unions with CAMELS ratings of 4 or 5 grew in both the second and third quarters of 2023.
Much of the growth in adverse CAMELS ratings has been concentrated among the nation's largest credit unions, Harper said. In the third quarter of 2023, there were 51 large, complex credit unions with composite ratings of 3, up by nine credit unions quarter over quarter.
"This means a large and growing share of the credit union system's assets reside in institutions with potential safety and soundness concerns that require immediate — let me stress that, immediate — remediation," Harper said at an event on Feb. 6.
The CAMELS scale, which is used by both bank and credit union regulatory agencies, measures an institution's capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk on a scale of 1 to 5, with 5 being the worst.
One area Harper is particularly worried about is credit quality. The credit union industry, which is largely focused on consumer lending, has seen an uptick in auto and credit card lending delinquencies recently, he said.
In the third quarter of 2023, delinquent loan and net charge-off ratios at US credit unions reached five-year highs, according to S&P Global Market Intelligence data analysis from November 2023.
The delinquency rate for federally insured credit unions rose 19 basis points from the year before to 72 basis points during the third quarter of 2023, according to Harper. Credit card delinquencies were 190 basis points, while automobile loan delinquencies were 78 basis points, up by 60 basis points, which Harper described as "well above historic averages."
Harper is also concerned about the industry's liquidity and access to funding sources and encouraged credit unions to use the NCUA's central liquidity facility, which is similar to the Federal Reserve's discount window. Credit unions should include the facility in their liquidity plans, instead of just using it "during times of crisis," Harper said.
However, fewer credit unions can access that funding source after statutory enhancements that expanded access expired at the start of 2023. Between the end of 2022 and Sept. 30, 2023, the number of credit unions with access to the facility declined to 399 from 3,990, according to Harper.
He said the NCUA is asking Congress to increase the facility's accessibility, particularly because a recent cybersecurity event highlighted the need for access to emergency funding.
In November 2023, hundreds of credit unions experienced system outages after a vendor was the subject of a ransomware attack. Of the estimated 443 credit unions that were affected by the event, only four have access to the central liquidity facility, Harper said.
Federal Home Loan Banks are another source of liquidity for credit unions, "but they're not that liquidity backstop at the end of the day when all heck happens," Harper said.
As credit unions with adverse CAMELS ratings rise, so too does the Federal Deposit Insurance Corp.'s "problem bank list," which includes banks with a rating of 4 or 5. There were 44 banks on the list for a total of $54 billion in assets in the third quarter of 2023, up from 43 banks and $46 billion in assets in the linked quarter.