Federal bank regulators recently proposed overhauling the CAMELS rating system, which they said would increase efficiency and transparency..The Federal Financial Institutions Examinations Council released the proposed revamp on May 19. Under the changes, the FFIEC would focus CAMELS component and composite ratings on factors “that materially affect an institution’s financial condition and risk profile.” The system is on a five-point scale, with a rating of 1 signaling top performance. Under the proposal, a rating of 1 and 2 would change to include financial institutions with “strong” financial performance and “minimal to moderate” risk management concerns. Institutions with more significant noncompliance would be given a rating of 3, while institutions with “deficient” financials would receive a rating of 4. Financial institutions with a rating of 5 would have “critically deficient” financial performance. The changes would also remove language directing examiners to give “special consideration” to the management part of the composite rating, and limit evaluation factors under the management component to the most substantial parts of risk management. “Removing the ‘special consideration’ given to the Management component in assigning composite ratings would ensure that supervisors take a more balanced approach that appropriately considers all composite ratings,” according to the FFIEC. Established in 1979, CAMELS is the main framework federal and state bank regulators use to assess the safety, soundness and financial health of banks. The system tracks six components: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity. The FFIEC said the current ratings system has not been updated in 30 years.Comments on the proposal are due Aug. 17. The proposed overhaul is positive for community banks as they do not need a similarly complex, overly-formalized CAMELS system as their larger peers, said Karen Grandstrand, chair of the bank and finance group at Minneapolis-based law firm Fredrikson. She especially supports reducing the reliance on the Management component as banks with strong financial metrics and capital numbers have received a downgraded rating and enforcement actions based solely on perceived Management shortfalls. The proposed changes also include eliminating the wording “not limited to,” which Grandstraid said has allowed examiners and agencies the option to go beyond listed factors in rating a bank. She said doing away with that would make regulators more consistent and transparent. FDIC Chair Travis Hill called the proposal “an important step in the FDIC’s ongoing efforts to reform bank supervision to focus on factors that materially affect an institution’s financial condition and risk profile.” While Comptroller of the Currency Jonathan Gould said he supported “the direction of this proposal,” he expressed concern the changes would not make the Management rating a standalone assessment instead of a reflection of other components. “It is imperative that financial institution regulators maintain a balanced and transparent supervisory perspective,” Gould said. “Absent extenuating circumstances, no single component rating should disproportionately drive the composite rating.” The American Bankers Association supports the proposal. “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,” said President and CEO Rob Nichols.
