Banks Press Regulators For Deeper Overhaul Of CAMELS Ratings
By CU Today Staff —
WASHINGTON—The banking industry is pressing federal regulators to go further in overhauling the confidential CAMELS supervisory rating system, calling for clearer limits on when examiners can downgrade institutions and, in one proposal, eliminating the separate Management rating altogether.
The push follows a Federal Financial Institutions Examination Council proposal that would refocus ratings on material financial risks, narrow the Management component and eliminate the “special consideration” currently given to Management when determining a bank’s overall rating, according to the American Bankers Association’s summary of the proposal.
The Bank Policy Institute said the proposal represents meaningful progress but does not go far enough to make ratings objective and tied to banks’ actual financial condition. BPI wants regulators to eliminate the Management component or replace it with a “Material Operational Risks and Internal Controls” component focused on issues such as cybersecurity, internal audit and compliance that could adversely affect financial condition. It also wants objective evaluation factors for the financial components, elimination of overlapping factors and clearer standards governing composite ratings and Matters Requiring Attention. BPI argues the stakes are substantial because CAMELS ratings, although confidential, can carry significant legal and financial consequences for banks.
The American Bankers Association likewise supports the regulators’ direction but is seeking additional guardrails. ABA wants clearer definitions of “material financial risk” and “significant non-compliance,” greater clarity on how specialty examination findings affect ratings, a Management component focused on institution-wide risk-management practices and clarification of the role of nonbinding supervisory observations. “Because CAMELS ratings carry significant consequences, the final framework should be objective, predictable and demonstrably tied to the institution’s financial condition and risk profile,” ABA said.
The Independent Community Bankers of America is taking a somewhat different position, supporting efforts to reduce excessive subjectivity while cautioning against changes that could prevent supervisors from identifying emerging problems before they become material financial losses. ICBA also has raised concerns about the proposed “material financial risk” standard, warning that an undefined standard could produce uneven results for institutions of different sizes and suggesting “material safety and soundness concern” as a more durable and appropriately tailored alternative. ICBA also urged regulators not to use the revised framework to reduce scrutiny of institutions whose failure or mismanagement could threaten financial stability.
The debate comes as regulators undertake a broader reassessment of bank supervision, with the CAMELS framework—which grades Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk—receiving a significant reconsideration.
Originally reported by CU Today.