CAMELS adjustment overdue, indicates need for proactive reg approach

Recent proposed updates to the CAMELS rating system could benefit community bankers by reducing administrative tasks and reducing the system’s reliance on Management considerations. The overhaul would be the rating system’s first in 30 years and demonstrates a troublingly slow timeframe for regulators to modernize standards. .Established in 1979, CAMELS is the main framework federal and state bank regulators use to assess the safety, soundness and financial health of banks. In seeking the overhaul, federal regulators cited the rating’s disproportionate weight on Management, which reflected their historical belief that leadership was at the core of strong financial performance. The rating was “double counted,” meaning it was already covered—and sometimes penalized—in the other parts of the framework. Banks with otherwise strong financial performance were being penalized for perceived management shortcomings. In covering the story, I learned that community banks, to comply with the current CAMELS system, must devote extensive time to paperwork and policies without any proven benefit. That has placed smaller banks at a competitive disadvantage with larger banks facing the same requirements but with more staff to handle the load, noted Karen Grandstrand, chair of the bank and finance group at Minneapolis-based law firm Fredrikson. The proposed updates include cutting down on administrative paperwork and procedural responsibilities to focus on material stability risks. CAMELS was only the latest example of a decades-old regulatory framework that placed community bankers at a competitive disadvantage. Another was the Department of Justice’s sole focus on the Herfindahl-Hirschman Index—using local deposits as its main gauge of market competition and concentration—for M&A from 1995-2024. While HHI is still used as a valuable tool, DOJ guidelines now also assess competition in retail banking, commercial banking and specialized loan services. The change had been years in the making, with the previous system not accounting for the rise in online banking, therefore benefitting larger banks and fintechs with generally more advanced digital services. Updates to CAMELS and M&A competitive analysis benefit smaller banks and highlight the importance of modernizing regulations to account for major changes and prevent community banks from falling behind in an already competitive landscape.