Coming Next Month:A Camel Proposal with Market-Risk Element

Bank and thrift regulators will soon propose a modified Camel rating system that takes into account the risks of shifting market conditions.

The Federal Financial Institutions Examination Council - the umbrella organization for the five banking, thrift, and credit union agencies - is expected to issue a proposal in mid-June to modify the 18-year-old interagency rating system. Field testing is to start at the same time.

Kevin Bertsch, a supervisory field analyst at the Federal Reserve, said Wednesday that the proposed system would examine how well institutions protect themselves from shifts in interest rates, changes in foreign currency values, and fluctuations in portfolio values.

Banks' management of these risks, Mr. Bertsch said, would become the sixth component of Camel, joining the five from which the rating system takes it name - capital, asset quality, management, earnings, and liquidity.

Though regulators were known to be weighing a risk-management component for Camel, it was not clear until now that the focus would be on market risks, and that a proposal was imminent.

"We thought the Camel system was in pretty good order, so we kept the overall framework," Mr. Bertsch said in an interview. "But one thing that hadn't been explicitly addressed in Camel is an institution's sensitivity to market risks."

He said the staffs from the regulatory agencies will complete work on the proposal by the end of next week.

Diane Casey, national director of regulatory issues for Grant Thornton, said that clearly identifying risk management as a part of Camel will give bankers a more distinct picture of what examiners expect from them.

"The 'm' of Camel has always been a judgmental thing on the part of examiners," Ms. Casey said. "For the first time there will be something more quantifiable in the 'm.' "

Staff at the regulatory agencies have not figured out how to incorporate a letter representing the new market risk component into "Camel." There had been talk of inserting an "r" for "risk" to create "Carmel," or using an "s" for "sensitivity to market risk" to make "Camels."

John Price, assistant director for supervisory policy at the Office of Thrift Supervision, said that coming up with a new name for the rating system has not been a priority.

"We have been focusing on substantive changes to the system," Mr. Price said. "Coming up with a new name has not been at the heart of the debate."

The Camel system was developed by the three federal banking agencies in 1978 after the General Accounting Office criticized them for inconsistency. The OTS for years had been using its own rating scale, "Macro"- for management, asset quality, capital adequacy, risk management, and operating results. But the thrift regulator switched to Camel in 1994.

The ratings have become more important in recent years, with the Federal Deposit Insurance Corp. using them to set risk-based premiums.

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