WASHINGTON — Federal banking regulators are proposing the most significant overhaul of the nation’s bank and credit union examination rating system in three decades, a move that would refocus supervisory reviews on material financial risks while reducing the influence of broader management-related assessments, according to an analysis.
The proposal, issued jointly by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board and the National Credit Union Administration, would represent the first major revision to the Uniform Financial Institutions Rating System, commonly known as CAMELS, since 1996.
The law firm Morgan Lewis noted the proposal would retain the existing six-component CAMELS framework (capital, asset quality, management, earnings, liquidity and sensitivity to market risk), while shifting the emphasis toward what regulators describe as “material financial risk.” The term appears repeatedly throughout the proposal and is intended to focus examinations on issues that materially affect an institution’s financial condition or risk profile rather than on deficiencies involving policies, procedures or documentation, Morgan Lewis noted.
The law firm said regulators believe the changes would improve both the effectiveness and transparency of examinations by concentrating supervisory attention on issues most likely to affect an institution’s safety and soundness.
Reduced Influence of Specialty Exam Areas
Morgan Lewis said the proposal would also reduce the influence of specialty examination areas — including Bank Secrecy Act compliance, consumer compliance, trust activities and information systems — when determining CAMELS ratings. Under the proposal, those specialty findings would affect component or composite ratings only if they materially affect an institution’s financial condition or create significant financial risk.
Morgan Lewis said the proposal reflects broader supervisory efforts following the 2023 collapse of Silicon Valley Bank to reduce subjectivity in examinations and place greater emphasis on measurable financial risks.
A Notable Change
One of the most notable changes would overhaul the Management component, which has historically carried outsized influence in determining a financial institution’s overall rating.
The proposal would remove several existing evaluation factors, including management’s responsiveness to examiner and auditor recommendations, management succession planning, willingness to serve community banking needs and overall institutional performance.
Morgan Lewis said the current Management rating has often been viewed as a catchall category that duplicated criticisms already reflected elsewhere in the examination process.
No More ‘Special Consideration’
The proposal also would eliminate language directing examiners to give “special consideration” to the Management rating when assigning an overall composite score. Instead, composite ratings would focus on financial performance, material financial risk and substantive compliance with laws.
Even with those revisions, Comptroller of the Currency Jonathan V. Gould said the proposal does not go far enough.
In a separate statement cited by Morgan Lewis, Gould said he remains concerned that the Management component continues to “double count” deficiencies already captured in other CAMELS categories.
“For the CAMELS framework to function effectively, each component must provide distinct, incremental value,” Gould said. “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.”
Sharply Differing Views
Morgan Lewis said regulators have received several dozen public comment letters reflecting sharply differing views.
Some commenters argued the proposal is part of a broader effort by the current administration to reduce regulatory scrutiny of financial institutions. Others called the revisions overdue and said they would better align examinations with meaningful financial risks.
Additional recommendations from commenters included creating a separate technology or information technology rating within CAMELS, making composite ratings public after 90 to 180 days, exempting community banks from any revisions to the ratings framework, and further reducing the possibility that management deficiencies could be counted multiple times during examinations.
Additional Caution
Morgan Lewis also noted that some critics cautioned the proposal’s emphasis on material financial risk could reduce examiners’ ability to identify emerging problems before they become financially significant, replacing forward-looking supervision with a greater reliance on lagging indicators.
