Washington, D.C. – Today, the Federal Financial Institutions Examination Council, an interagency regulatory body, proposed changes to the Uniform Financial Institutions Rating System, commonly known as the CAMELS rating system. The Bank Policy Institute issued the following statement in response to the proposal:
“Today’s proposal would align banks’ ratings more closely with their financial condition and focus bank supervision on material financial risks. We welcome the direction of these changes and look forward to commenting on the proposal. As the proposal acknowledges, the Management component has had undue weight in determining bank ratings. Improving supervision requires reforming the ‘M.’” – Greg Baer, BPI President and CEO
What is CAMELS?
The CAMELS rating system evaluates banks on Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. It was first put in place more than four decades ago, with little to no meaningful update since that time.
- BPI has long expressed concern about the Management, or “M,” component of CAMELS, which often functions as a catch-all category in which subjective examiner judgments result in tangible penalties. Under the current framework, the M exerts outsize influence on the bank’s overall rating yet has little utility as an assessment of the financial strength of the bank.
- A more objective “M” would focus on material risk and objective measures, BPI has said.
Proposed Changes
The proposal includes changes that would:
- Focus component and composite ratings on factors that materially affect an institution’s financial condition and risk profile.
- Make changes to the Management rating, including removing certain subjective evaluation factors and removing a directive that it be given “special consideration” when assigning a composite rating.
- Provide that an institution receive a Management rating of “3” or worse only when risk management practices result in material financial risk to the institution.
- Revise the composite rating definitions to emphasize material financial risk. For example, the proposal would change the composite “3” definition to state that such a rating should only be given to financial institutions that exhibit less than satisfactory financial performance, inadequate risk management practices that result in material financial risk or significant noncompliance with laws and regulations.
Broader Context.
The CAMELS proposal follows the Federal Reserve’s overhaul of its Large Financial Institution ratings framework and aligns with the banking agencies’ overall push to refocus supervision on material financial risk.
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About Bank Policy Institute.
The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.
Media Contacts
Tara Payne
Bank Policy Institute
tara.payne@bpi.com
