Federal regulators are proposing to make several changes to the CAMELS rating system to emphasize material financial risks over concerns related to policies, procedures and documentation, which they say would better reflect the issues most likely to affect a financial institution’s safety and soundness.
Under a proposal published today, the Federal Financial Institutions Examination Council said the Uniform Financial Institutions Rating System hasn’t been updated since 1996. The revisions would retain the basic ratings framework of the but make changes that “emphasize factors that materially affect an institution’s financial condition and risk profile.”
For example, the UFIRS framework uses composite ratings 1 through 5, and the proposal would revise the terminology of each rating category to emphasize material financial risks. Ratings 1 and 2 would be rewritten to clarify that financial institutions have strong financial performance and only weak or moderate risk management concerns. Institutions with “significant” legal noncompliance would be assigned a rating of 3. A rating of 4 would designate institutions with “deficient” financial performance, while a rating of 5 would identify firms with “critically deficient” financial performance.
Other proposed changes include removing a sentence directing examiners to give “special consideration” to the management component in the composite rating; limiting the management component’s evaluation factors to the most material aspects of risk management; removing “broad language” on capital adequacy, asset quality, earnings, liquidity and sensitivity to focus on more specific risk management factors; and updating and modernizing the terminology used throughout the framework.
Comments on the proposal are due by Aug. 17.
Regulators appear split on proposed changes
In a statement, FDIC Chairman Travis Hill called the proposal an important step to reform bank supervision.
“The proposal is intended to modify how the overall composite and individual component ratings are described to shift the emphasis away from a bank’s process for managing risks and towards factors and risks that materially impact a bank’s financial condition,” he said.
However, Comptroller of the Currency Jonathan Gould said that while he supports the direction of the revisions, the current proposal does not sufficiently address “double counting” within the management component.
“For the CAMELS framework to function effectively, each component must provide distinct, incremental value,” Gould said. “Historically, the management rating has reflected deficiencies already captured in other components. To maintain the integrity and transparency of the CAMELS system, it is vital that the management rating serve as a standalone assessment rather than a secondary reflection of other components.”
ABA weighs in
American Bankers Association President and CEO Rob Nichols welcomed the proposal and regulators’ focus on material financial risks rather than policies, procedures and paperwork.
“As we have shared previously, there are opportunities to make thoughtful improvements to the CAMELS framework that prioritize safety and soundness without imposing unnecessary compliance burdens that take banks’ time and resources away from serving their customers and communities,” he said. “We look forward to reviewing the proposal with members and sharing our perspective during the comment process.”
