Fed, FDIC will explore changes to Camels rating system

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WASHINGTON — The Federal Reserve and the Federal Deposit Insurance Corp. are seeking public input on the rating system used to score banks' overall health, which financial institutions have criticized as misleading and unreliable.

As part of their exams, banks receive total combined scores and individual scores in five areas: capital adequacy, assets, management capability, earnings, liquidity and sensitivity to market risk. A bank is rated on a scale from one to five, and those ratings are not disclosed to the public.

The Fed and FDIC on Friday issued a request for comment "on the consistency of ratings assigned under the CAMELS system," they said in a joint press release. "The agencies are also interested in comments concerning how they use CAMELS ratings in enforcement actions and in reviewing bank applications."

FDIC Chairwoman Jelena McWilliams has said re-examining Camels is one of her top priorities as chair, noting that the system has not been open for public discussion since the mid-1990s.

In her first speech last year after taking the agency's reins, McWilliams suggested the regulators need to determine if the Fed, FDIC and Office of the Comptroller of the Currency use the rating system consistently. (The OCC was not included on Friday's issuance.)

“I am going to take a look anew at the Camels rating. It guides so much what a bank can and cannot do,” McWilliams said. “I actually wonder whether the three agencies apply the Camels rating uniformly. And to the extent that they don’t, why not and what does it mean?”

The FDIC and the Fed's request for information asked whether the agencies are assigning ratings in a manner that is consistent with the Camels system, how the agencies communicate a Camels rating after on-site examinations and if the use of the Camels system varies from one examination cycle to another.

The regulators also asked what practices they should consider changing “to enhance the consistent assignment of Camels ratings,” what elements of a Camels rating should receive more or less emphasis, how a rating impacts what enforcement actions are issued and how a rating might affect a bank’s business activities.

The public can comment on the questions the agencies posed for 60 days after the request for information is published in the Federal Register.

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Regulatory reform Regulatory guidance Community banking Policymaking Jelena McWilliams Federal Reserve FDIC