This brief note tells what we think is an interesting substantive and procedural story on CAMELS ratings, but at heart is just an excuse to deliver a really good pun.
In our article, How Supervision Lost Its Way, we noted the following:
It is worth examining the predictive ability of CAMELS ratings. Consider the number of banks rated as weak (CAMELS 3, 4, or 5 in Exhibit 1).
This chart seems to demonstrate little predictive ability for CAMELS ratings. In 2007, a small percentage was rated as weak, but hundreds failed.
The chart came from a research note published by Federal Reserve Board economists (Bassett, W.F., Seung J. Lee and Thomas P. Spiller, “Estimating changes in supervisory standards and their economic effects,” Journal of Banking & Finance, Volume 60, November 2015, Pages 21-43).
We found this result remarkable, and wanted to know more. In particular, we wanted to know whether CAMELS ratings had been similarly non-predictive or negatively predictive in other periods. (That, and we love data and colorful charts.)
Accordingly, in May, we filed a FOIA request with the Federal Reserve, followed by identical requests to the OCC and FDIC, seeking information on how many banks received each rating (1-5) over time. We made clear that we were not seeking the rating for any individual bank, and therefore not seeking confidential information, just the aggregate numbers — indeed, the same aggregate numbers that the Fed economists had already released to the public in their article.
Sadly, we have not been able to get our noses under the CAMELS tent.
The OCC denied our response within a matter of days, citing provisions in the FOIA allowing agencies to withhold “inter-agency or intra-agency memorandums or letters which would not be available by law to a party other than an agency in litigation with the agency” and “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” Of course, the aggregate, anonymized data we sought in no way met either standard for exemption.
After some back and forth, the FDIC staff this week denied our FOIA request on the grounds that they had no responsive documents: in particular, the denial states that the agency does not keep track of the number of institutions rated 1-3, though it does track the number of 4 and 5 rated institutions and publishes that number. From this statement, we can safely assume that the FDIC has never undertaken the kind of study that the Federal Reserve conducted on how predictive CAMELS ratings are. Whether this has constituted willful blindness or simply indifference we cannot say, but it is remarkable that an agency would not seek to backtest or otherwise study the accuracy of its most important supervisory tool. Sort of like a pharmaceutical company telling you that it doesn’t track how patients perform under their medications, except when they die.
The Federal Reserve is still processing our request….