FFIEC Proposes Major CAMELS Overhaul
Commentary by Tim Byrne
The Federal Financial Institutions Examination Council ("FFIEC") proposed the first substantive revisions to the Uniform Financial Institutions Rating System ("UFIRS,") known as CAMELS, in nearly 30 years. FFIEC said that the proposed revisions are intended to focus ratings on material financial risk and improve the transparency of ratings.
The CAMELS rating system evaluates the safety and soundness of financial institutions, assessing six components: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. An institution is assigned a rating for each component and a composite rating. In the Notice and Request for Comment, published in the Federal Register, FFIEC proposed removing the special weighting given to the Management component in composite ratings, raising the threshold for a Management rating of 3 or worse, limiting how specialty examinations influence the composite score, and eliminating all references to reputation risk.
FFIEC said an analysis of ratings from 2000 to 2025 showed the Management component had been the most influential factor in determining composite ratings, particularly in recent years, and proposed removing the special consideration the Management component receives when assigning the composite rating. The proposal would require a material-financial-risk threshold for assigning a Management rating of 3 or worse, so that weaknesses in policies, procedures, or documentation alone would no longer support a downgrade. Three existing Management evaluation factors would be dropped: management depth and succession; responsiveness to recommendations from auditors and supervisory authorities; and demonstrated willingness to serve the legitimate banking needs of the community.
FFIEC proposed that findings from specialty examinations, including Compliance, Bank Secrecy Act and anti-money laundering, Community Reinvestment Act, information technology, and trust, would influence CAMELS ratings only to the extent they affect an institution's overall financial condition, represent material financial risks, or reflect significant noncompliance with laws and regulations. Composite-rating definitions would be rewritten using standardized descriptors of financial condition ("strong," "satisfactory," "less than satisfactory," "deficient," "critically deficient") and risk-management practices ("effective," "adequate," "inadequate," "deficient"). A composite 4 or worse could not be driven by risk-management weaknesses alone absent observable deterioration of financial condition. The proposal would also strike "but not limited to" language from component evaluation-factor lists, requiring examiners to document why any additional factor applies.
The proposal would add explicit evaluation factors including contingent liabilities under Capital Adequacy; funding costs and commodity-price earnings exposure under Earnings; and recent net interest income performance, expectations for net interest income, and interest-rate-volatility exposure under Sensitivity to Market Risk. References to "allowances for loan and lease losses" would be updated to "allowances for credit losses" to conform with the current expected credit losses standard. All references to reputation risk would be removed, consistent with separate proposals from the federal banking agencies. The proposal would not change CAMELS-rating confidentiality - ratings would continue to be disclosed to an institution's Board of Directors and senior management. The proposal would not change examination frequency or process.
FFIEC requested comment on 11 specific questions, including the appropriate threshold for incorporating specialty-review findings into CAMELS, the treatment of legal and regulatory compliance, and whether sub-satisfactory Management ratings should be rare when other components are satisfactory.
FFIEC issued the proposal on behalf of its member agencies: the Federal Reserve Board, FDIC, NCUA, OCC, and the State Liaison Committee. The Consumer Financial Protection Bureau, also a FFIEC member, does not use CAMELS.
Comments are due by August 17, 2026.
Commentary
The proposed revision to the bank ratings framework is consistent with the approach that regulators have taken to supervision recently, including the Fed’s recently revised Statement of Supervisory Operating Principles.
Key features of the proposal are that the CAMELS components are retained, but there would be an emphasis on the consideration of material financial risks over concerns related to policies, procedures, and documentation. In addition, the framework would no longer assign “special consideration” to the management rating when assigning the composite rating, and it appears that fewer institutions would be rated 3 or worse under the proposed new standards. This should allow more institutions to obtain faster regulatory approvals to make acquisitions and launch new products.
Moreover, the factors informing the management rating itself would be changed to focus on the most material aspects of risk management, removing considerations such as management succession. Instead, factors such as poor financial or regulatory reporting or significant noncompliance with law would be more important. While some other factors are also being removed, such as responsiveness to recommendations from auditors and supervisory authorities, one would think these would continue to be important to good regulatory relations as a practical matter. The proposal notes a potential risk that the proposed changes could cause management to deprioritize certain risk management practices, further stating that “research suggests that the current formulation of supervisory ratings has been more informative about bank failure than balance sheet metrics alone.”
The comments on this proposal should be very interesting.