Federal regulators are preparing to unveil the first big change in their central method for rating banks' strength since it was launched 18 years ago.
Under the plan, banks would get five separate Camel grades, plus a composite score. Banks now get just one grade.
The five new grades will correspond to the areas covered by Camel: capital, asset quality, management, earnings, and liquidity.
The new system, announced by the Federal Deposit Insurance Corp. Friday, could give bank managers useful guidance, some observers said. But others warned that the system may make bank examinations more contentious.
The FDIC said that state-chartered, nonmember banks would begin seeing the new system Oct. 1. The other agencies - the Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision - will start giving five grades Jan. 1.
The changes come as regulators are working to add a sixth component to Camel - sensitivity to market risk. Many bankers have criticized the step as unnecessary.
Under the current rating system, each bank or thrift gets a Camel grade ranging from 1 to 5, with 1 as the best. Though the scores are not made public, they are important because they determine how much a bank must pay for deposit insurance and how strictly it is supervised.
The best-rated banks currently pay nothing for government insurance and face less-restrictive regulation from all agencies.
The rating system has not undergone a major change since it was launched in 1978.
Robert G. Rowe, regulatory counsel for the Independent Bankers Association of America, praised the plan to grade each of the five Camel components.
"Bankers want feedback," he said. "The more information they get from examiners, the better off they are. Individual ratings will give them a better way to focus their energies."
Nicholas J. Ketcha Jr., the FDIC's director of supervision, said examiners now orally discuss the various components with bankers. But under the new policy, banks will get a written report that explains how examiners arrived at each component rating.
Doling out five separate ratings may make Camel more meaningful and return more leverage to regulators, who have watched the number of Camel 1- or 2-rated banks climb to 93% of the industry.
Regulators agreed to the idea in July, but the Fed, the OCC, and the OTS are delaying adoption until the sixth component is incorporated into Camel. That change will cause the system to be called Camels, with the "s" standing for sensitivity to market risks.
Cary H. Hiner, FDIC associate director for policy, said the new policy would not interfere with plans to add the sixth component. "If anything, it might ease that transition because bankers will get more familiar with all the components," he said.
It's particularly important that bankers understand their management rating, Mr. Hiner said. "That's the heart of how the bank is run."
Mr. Ketcha said the FDIC is concerned that banks with good composite ratings aren't paying enough attention to examiners' concerns about individual components.
Explaining each component grade in writing also will improve the examination process, Mr. Hiner added. "It will bring discipline to the examiners, who will have to be able to think through, articulate, and support their findings," he said.
Diane M. Casey, national director of financial services for Grant Thornton LLP, said the FDIC move is significant. But she said exams could get more contentious.
For example, if an examiner gave the highest rating to every component except management, the bank might argue. "They might say, 'How can we be running this great bank if we're not terrific managers?'" Ms. Casey said.
Alexandria, Va., banking consultant Bert Ely praised the new policy, saying it would make examiners think through each grade they assign. "The process will be enhanced even though it will create some discomfort," Mr. Ely said.
Bank consultant Karen Shaw Petrou, president, ISD Shaw Inc., said bankers already have a good idea of how examiners rate them on each component.
"This is making explicit what the nonclueless banker believes is implicit," she said. Specifying each component score will help bank directors, particularly outside directors, understand the institution's strengths and weaknesses, she added.