To the Editor:

You state in your page 1 March 22 article “Camels Data Show Downturn’s Roots in ’98” that “The number of average banks, those with Camels ratings of 3, has steadily climbed during the last three years, reaching 662 last year from 277 in 1998.”

A composite rating of 3 is NOT an average rating, it is an unsatisfactory assessment given to banks with moderate to severe weaknesses. An increase in the number of institutions rated 3 is an adverse trend in the safety and soundness of the overall banking industry.

According to the Uniform Financial Institutions Rating System, adopted by all the federal banking agencies, a composite rating of 3 is defined as follows:

“Financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4.

Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2.

Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institution’s size, complexity, and risk profile.

These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely, however, given the overall strength and financial capacity of these institutions.”

Michael Cawthon
Bank examiner
Federal Deposit Insurance Corp.

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