Ratings
Credit unions that maintain a level of capital fully commensurate with their current and expected risk profiles and can absorb any present or anticipated losses are accorded a rating of 1 for capital. Such credit unions generally maintain capital levels at least at the statutory net worth requirements to be classified as "well capitalized" and meet their risk-based net worth requirement. Further, there should be no significant asset quality problems, earnings deficiencies, or exposure to credit or interest-rate risk that could negatively affect capital.
A capital adequacy rating of 2 is accorded to a credit union that also maintains a level of capital fully commensurate with its risk profile both now and in the future and can absorb any present or anticipated losses. However, its capital position will not be as strong overall as those of 1 rated credit unions. Also, there should be no significant asset quality problems, earnings deficiencies, or exposure to interest-rate risk that could affect the credit union's ability to maintain capital levels at least at the "adequately capitalized" net worth category. Credit unions in this category should meet their risk-based net worth requirements.
A capital adequacy rating of 3 reflects a level of capital that is at least at the "undercapitalized" net worth category. Such credit unions normally exhibit more than ordinary levels of risk in some significant segments of their operation. There may be asset quality problems, earnings deficiencies, or exposure to credit or interest-rate risk that could affect the credit union's ability to maintain the minimum capital levels. Credit unions in this category may fail to meet their risk-based net worth requirements.
A capital adequacy rating of 4 is appropriate if the credit union is "significantly undercapitalized" but asset quality, earnings, credit or interest-rate problems will not cause the credit union to become critically undercapitalized in the next 12 months. A 4 rating may be appropriate for a credit union that does not have sufficient capital based on its capital level compared with the risks present in its operations.
A 5 rating is given to a credit union if it is critically undercapitalized, or has significant asset quality problems, negative earnings trends, or high credit or interest-rate risk exposure is expected to cause the credit union to become "critically undercapitalized" in the next 12 months. Such credit unions are exposed to levels of risk sufficient to jeopardize their solvency.
Read more about this topic: CAMEL Rating System