PEARLS vs.

CAMEL(S)

ICURN Regulators Roundtable

June 2012

Michael Edwards
Chief Counsel and VP for Advocacy &
Government Affairs
World Council of Credit Unions
medwards@woccu.org
www.woccu.org

PEARLS & CAMEL(S)

PEARLS: WOCCU developed PEARLS

(PERLAS) beginning in 1987 through the
USAID Cooperative Strengthening
Project in Guatemala (1987-1993).
CAMEL: NCUAs supervisory monitoring
system for U.S. credit unions; NCUA
adopted CAMEL beginning in the 1987; S
(Sensitivity to market) later added for
banks but not for credit unions.

Quantitative vs. Qualitative Approach

PEARLS is solely quantitative and was

first designed as a management tool but
later became an effective supervisory
mechanism. On-site examination is not
required but is encouraged.
CAMEL was created as a supervisory
tool and relies on on-site examination and
examiners opinions (i.e. examiners
qualitative observations and opinions).

Seven Deadly Credit Union Sins

1. External dependency;
2. Confusing, nonstandard financial
information;
3. Uncompetitive rates on
savings (because of
artificially cheap rates
on loans);
Detail from The Seven Deadly Sins
and the Four Last Things by
Hieronymus Bosch (about 1500)

Seven Deadly Credit Union Sins

4. Poor public perception of and lack of

trust in credit unions as a financial
institution and safe keeper of savings;
5. Undisciplined financial operations;
6. Failure to determine whether the
member receiving the loan can afford to
repay it; and
7. Putting social philosophy over common
business sense.

PEARLS
PEARLS (uses 40+ quantitative ratios in 7
categories; no examiner opinions):

Protection

Effective Financial Structure

Asset Quality

Rates of Return and Costs

Liquidity

Signs of Growth

CAMEL(S)

CAMEL(S):
Capital adequacy
Asset quality
Management
Earnings
I would go into tse-tse fly country if there were
books to be examined. J. Pinkerton
Liquidity & ALM
Snoopington, Examiner (The Bank Dick, 1940)
(Sensitivity to market) Not applicable to
credit unions

CAMEL(S)
The CAMEL system assigns a rating for
each component of the system (e.g.,
Capital adequacy) using a scale from 1
(best) to 5 (worst) based on on-site
evaluation of qualitative and quantitative
information (M Management is only
qualitative).
CAMEL also assigns each credit union a
composite CAMEL rating of 1 to 5 based
on its individual ratings.

CAMEL Ratings

Rating 1 - Sound in every respect. Any

weaknesses are minor and can be
handled in a routine manner by the board
of directors and management.
Rating 2 Fundamentally sound. Only
moderate weaknesses are present.
Rating 3 - Some degree of supervisory
concern over weaknesses that may range
from moderate to severe.

CAMEL Ratings

Rating 4 Unsafe and unsound practices

or conditions stemming from serious
financial or managerial deficiencies that
result in unsatisfactory performance.
Rating 5 Extremely unsafe and
unsound practices and conditions beyond
management's ability or willingness to
control or correct. Ongoing supervisory
attention and intervention is necessary.
Failure may be probable.

CAMEL: Capital adequacy

Capital adequacy (assessment factors):

Capital level and quality of capital;

Overall financial condition;
The ability of management to address emerging needs for additional
capital;
Compliance with risk-based net worth requirements;
Composition of capital;
Interest and dividend policies and practices;
Quality, type, liquidity, and diversification of assets, with particular
reference to classified assets;
Loan and investment concentrations;
Balance sheet composition including the nature and amount of market
risk, concentration risk, and risk associated with nontraditional activities;
Growth plans and past experience managing growth; etc.

CAMEL: Asset quality

Asset quality (assessment factors):

The quality of loan underwriting, policies, procedures, and practices;

The internal controls and due diligence procedures in place to review new
loan programs, high concentrations, and changes in underwriting
procedures and practices of existing programs;
The level, distribution, and severity of classified assets;
The adequacy of the allowance for loan and lease losses and other asset
valuation reserves;
The level and composition of nonaccrual and restructured assets;
The ability of management to properly administer its assets, including the
timely identification and collection of problem assets;
The existence of significant growth trends indicating erosion or
improvement in asset quality;
The existence of loan concentrations that present undue risk to the credit
union;
The appropriateness of investment policies and practices; etc.

CAMEL: Management

Management (assessment factors):

Corporate governance (compensation
policies, conflicts of interest, professional
ethics and behavior)
Strategic planning;
Internal controls (IT systems, segregation
of duties, audit program, record keeping,
safeguarding assets, staff education);
Adequacy of policies and procedures; etc.

CAMEL: Earnings

Earnings (assessment factors):

Quality and sources of earnings;

Ability to fund capital commensurate with current and prospective
risk through retained earnings;
Adequacy of valuation allowances;
Adequacy of budgeting systems, forecasting processes, and
management information systems, in general;
Future earnings adequacy under a variety of economic conditions;
Quality and composition of assets;
Earnings exposure to market risk including interest rate risk; and
Material factors affecting the credit union's income producing ability
such as fixed assets and other non-earning assets.

CAMEL: Liquidity

Liquidity and Asset-Liability Management

(assessment factors)

Interest-rate risk exposure at the instrument, portfolio, and balance sheet

levels;
Balance sheet structure;
Liquidity management;
Qualifications of asset-liability management personnel;
Quality of oversight by the board and senior management;
Earnings and capital adequacy over changing economic climates;
Prudence of policies and risk limits;
Business plan, budgets, and projections;
Contingency planning to meet unanticipated liquidity events;
Contingency planning to handle periods of excess liquidity;
Cash flow budgets and projections; and
Integration of liquidity management and ALM with planning & decisions.

Differences Between CAMEL and PEARLS

CAMEL examiners
subjective opinions from
observations can add
useful supervisory
information not captured
by purely quantitative
measures.
On-site examination
better at detecting fraud.
Examiner Snoopington with an institution
affiliated party who has something to hide.
(The Bank Dick, 1940)

Differences Between CAMEL and PEARLS

PEARLSs quantitative objectivity limits

possibility of influencing the rating.
PEARLS quantitatively evaluates the
financial structure of the balance sheet
(balance sheet structure has a direct
impact on efficiency and profitability).
PEARLS places a quantitative focus on
growth rates (growth of total assets is a
key strategy to address problems related
to monetary devaluations and inflation).

Thank you
Michael Edwards
Chief Counsel and VP for
Advocacy & Government Affairs
World Council of Credit Unions
medwards@woccu.org
www.woccu.org