Circuit Court gives Chicago bank right to appeal CAMELS rating

A Chicago court has said a bank can challenge a regulator's determination about the bank. The 7th U.S. Circuit Court of Appeals did not decide whether the appeal brought by Builders Bank, Chicago, regarding its CAMELS rating is correct, but in mid-January it ruled the $41 million institution has the right to dispute its rating in court. The case will return to the Northern District of Illinois, Eastern Division, for that determination..A 2016 exam left Builders Bank with a CAMELS rating of 4, but the bank argues it deserved a 3 and "the lower rating is arbitrary and capricious," as Judge Frank Easterbrook wrote in the 7th Circuit Court opinion. The district court dismissed the case, arguing it did not have the jurisdiction to consider amending the FDIC rating..CAMELS ratings normally are kept private, but the rating for Builders Bank was revealed in the court's opinion..In addition to maintaining the right to issue the rating, the FDIC argued a CAMELS rating should be unreviewable because the FDIC has the discretion to set necessary levels of capital. Easterbrook pointed to the subjectivity of the other five categories — assets, management capability, earnings, liquidity and sensitivity.."The examiners may be right or wrong about those other issues, but a district court could ask whether the FDIC's final rating was arbitrary, or supported by substantial evidence, without making any inroad on the agency's discretion to evaluate a bank's capital adequacy," Easterbrook wrote..Builders Bank told the court it is not challenging the capital requirements as given, only the other factors. The FDIC disputed this claim. This distinction may not be of legal consequence, according to Easterbrook. He provided an example of an examiner mistaking a $1 million asset as a $1 million liability, thus greatly altering a bank's net capital.."All we hold today is that the presence of capital as one of six components in a CAMELS rating does not necessarily mean that the rating as a whole is committed to agency discretion," Easterbrook wrote..The ruling was not thoroughly in Builders Bank favor, though. Easterbook pointed out the bank failed to appeal within the FDIC's Supervision Appeals Review Committee, and he acknowledged a possible argument that the CAMELS rating is not actually a final decision, but the insurance rates tied to it are. Builders Bank appealed the rating, not the insurance rates, presenting a possible legal loophole..Easterbrook also presented the counterargument, "the effect of CAMELS ratings on insurance premiums creates a concrete stake that makes the current dispute justiciable.".Since the FDIC did not present either argument, the court was also willing to look past them.."That the bank may have sought judicial review prematurely therefore does not require a court to dismiss the suit when the agency has acquiesced in immediate review," Easterbrook wrote..The case has returned to the Northern District of Illinois, Eastern Division, where Judge Robert Gettleman will preside.