Regulators propose CAMELS rating overhaul

• Key insight: The Federal Financial Institutions Examination Council proposal would curb management's weight in the overall ratings given to a bank, heeding bank industry calls to reform the supervisory rating system.
• Expert quote: "We welcome the direction of these changes and look forward to commenting on the proposal. As the proposal acknowledges, the Management component has had undue weight in determining bank ratings." — Bank Policy Institute President and CEO Greg Baer
• Forward look: Comments on the proposal are due Aug. 17. 

Federal regulators proposed revising the supervisory ratings framework for the first time in three decades, a move bank trade groups requested in August following a proposal from the Federal Reserve System making changes to a similar rating system used for large banks.

The Federal Financial Institutions Examination Council — whose members include a member of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corp., Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, National Credit Union Administration and state banking representatives — issued the proposal Tuesday and will take comment through August 17.

FFIEC Chair and Federal Reserve Vice Chair for Supervision Michelle W. Bowman characterized the move as a step toward calibrating examinations more closely to the real risks banks face. 

"The revised CAMELS framework marks a decisive shift toward transparency, quantitative factors, and predictability of supervisory oversight," FFIEC Chair Bowman said in a press release. 

The CAMELS system, established in 1979 and last updated in 1996, is the supervisory framework banking regulators use to evaluate a financial institution's overall condition and safety and soundness. The acronym refers to the six buckets of standards examiners assess: capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. 

The move to revise the framework comes as the Trump administration moves to soften a number of regulations on banks, including Community Reinvestment Act standards, bank merger standards, loosening capital restraints, as well as a number of rules on community banks, including the community bank leverage ratio. 

The FFIEC proposal would remove a standard requiring that the management rating receive special consideration in composite ratings, narrowing the management component to core risk-management issues, and would further require ratings downgrades to be tied to material risk. 

The agencies would also revise composite ratings definitions to create clearer thresholds under the proposed rule, distinguishing "strong," "satisfactory," "deficient," and "critically deficient" institutions. The proposed standards would also remove reputational risk from consideration, as the FDIC and OCC have both already done. 

FDIC Chair Travis Hill said the proposal aims to move away from process and towards factors and material, tangible risk.

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"Under the proposal, a bank's internal controls and risk management would remain relevant in the overall evaluation, but the primary focus of the ratings system would be on fundamental financial risks most pertinent to safety and soundness," Hill said in a release. "Key changes would include reducing the influence of the Management component rating on the overall composite rating; limiting the impact of specialty exam considerations to those that pose material financial risk; and focusing the ratings definitions and evaluation factors on the areas most impactful to an institution's financial condition."

Comptroller of the Currency Jonathan Gould said while he supported issuing the proposal for comment, he wants to see an even more restrictive framework. He argues the M component continues to double-count risks measured elsewhere. 

"To maintain the integrity and transparency of the CAMELS system, it is vital that the Management rating serve as a standalone assessment rather than a secondary reflection of other components," Gould said. "Absent extenuating circumstances, no single component rating should disproportionately drive the composite rating. A bank's overall health is the sum of its parts, and the composite rating should be a transparent evaluation of all the factors rather than being driven by a single component."

The Bank Policy Institute's President and CEO Greg Baer issued a statement commending the proposal, saying the changes to management are particularly welcome. 

"We welcome the direction of these changes and look forward to commenting on the proposal," Baer said. "As the proposal acknowledges, the Management component has had undue weight in determining bank ratings."