FFIEC Proposes Revisions to CAMELS Rating System

Yesterday, the Federal Financial Institutions Examination Council (the “FFIEC”)[1] released a notice of proposed rulemaking (the “Proposal”) to revise the Uniform Financial Institutions Rating System, commonly referred to as the “CAMELS” rating system.[2] If finalized, the Proposal would be the first update to the CAMELS rating system since 1996.[3]

The Proposal would retain the basic framework of the existing CAMELS rating system, with modifications aimed at focusing the component and composite ratings on factors that “materially affect an institution’s financial condition and risk profile” and at “improv[ing] [the] transparency” of the ratings “by more clearly articulating expectations for financial institutions.” In particular, the proposed revisions would decrease the prominence of the Management component in CAMELS ratings, both by reducing the emphasis on the Management component in the composite rating and as a consideration that is currently woven into the other non-Management components.

The Proposal marks a continuation of the federal banking agencies’ ongoing efforts to refocus the supervisory process and ratings on material financial risks and deemphasize supervisors’ qualitative management evaluations.[4] FFIEC Chair and Federal Reserve Board Vice Chair for Supervision Michelle Bowman remarked that the “revised CAMELS framework marks a decisive shift toward transparency, quantitative factors, and predictability of supervisory oversight.”[5] FFIEC Vice Chair and FDIC Chairman Travis Hill noted that the Proposal is intended to “shift the emphasis away from a bank’s process for managing risks and towards factors that materially impact a bank’s financial condition.”[6] Comptroller of the Currency Jonathan Gould, while “support[ing] the direction of [the] proposal,” expressed concern that “the revisions do not sufficiently address ‘double counting’ within the Management” component.[7]

Comments on the Proposal are due on August 17, 2026. A redline of the Proposal against the current CAMELS rating system language is available at the following link: /SullivanCromwell/_Assets/PDFs/Memos/FFIEC-Proposed-Revisions-Updated.pdf.

Background

The FFIEC prescribes principles and standards for the federal examination of financial institutions and makes recommendations to promote consistency and coordination in the supervision of financial institutions.

The CAMELS rating system, which applies to insured depository institutions (“IDIs”),[8] was developed and recommended by the FFIEC for implementation by the supervisory agencies. Under the system, each IDI is assigned component ratings and a composite rating­, which reflect examiners’ evaluation of the IDI’s financial condition and operations. The component ratings, which give the system its name, are (1) Capital Adequacy, (2) Asset Quality, (3) Management, (4) Earnings, (5) Liquidity and (6) Sensitivity to Market Risk. Composite ratings are assigned based on an overall evaluation and the six component ratings.

For each of the components, as well as the composite rating, each IDI is assigned a rating on a scale of 1 to 5, with 1 being the highest rating. An IDI generally must have a CAMELS composite rating of 1 or 2 and a Management rating of at least 2 (satisfactory) to be considered “well managed.”[9] Numerous regulatory restrictions apply to a banking organization whose IDI is not considered well managed, including limitations on the ability of a parent that is a financial holding company to expand its activities,[10] possible loss of a parent’s status as a financial holding company,[11] prior notice requirements for certain corporate changes[12] and a presumption of denial for certain applications to engage in expansionary activities.[13]

The Proposal follows a review by the FFIEC of the CAMELS framework, which considered academic literature, “existing” (i.e., not newly solicited) comments from industry and the FFIEC agencies’ analysis of their own data on the CAMELS rating system from 2000 through 2025. The FFIEC noted that its review of the academic literature had indicated that “CAMELS ratings contain important information about the overall condition of [IDIs], including information that is not readily available from balance sheet metrics or other publicly available materials.” However, industry comments suggested that the Management component has been overweighted relative to the other components in the composite rating. The agencies’ own analysis found that “while composite and component ratings generally move together, their correlation can vary significantly over time,” and that the Management component has been the most influential factor in determining composite ratings, particularly in recent years.

Proposed Revisions to the CAMELS Rating System

Changes to the Management Component

The FFIEC proposed several changes in relation to the Management component rating.

No “Special Consideration” to Be Given to the Management Rating

Currently, the CAMELS framework states that “special consideration” is given to the Management rating in determining the composite rating. The Proposal would remove this language to “ensure that supervisors take a more balanced approach that appropriately considers all component ratings.”

Changes to the Management Component Evaluation Factors

The Proposal would remove certain of the Management component’s evaluation factors, with the stated goal of “focus[ing] on the most material aspects of risk management.” In particular, the Proposal would remove evaluation factors related to management depth and succession, responsiveness to recommendations from auditors and supervisory authorities and demonstrated willingness to serve the legitimate banking needs of the community. To “limit redundancy,” the Proposal would also remove the evaluation factor related to overall performance of the IDI and its risk profile.

Changes to the Management Component Definitions

The Proposal would revise the Management component rating definitions to clarify that IDIs generally should receive a component rating of 3 or worse based on risk management weaknesses only when their risk management practices result in material financial risk to the IDI. IDIs may also receive a 3 or worse if they “have unreliable financial or regulatory reporting, have failed to safeguard assets, or are in significant noncompliance with law or regulation.”[14] This proposed revision aims to “better align the severity of Management ratings with the risk to [an IDI’s] safety and soundness.”

Treatment of “Specialty Review” Findings

Under the current framework, findings from “specialty reviews” (which focus on areas including compliance, community reinvestment, government security dealers, information systems, municipal security dealers, transfer agent, and trust) are often incorporated into the Management component rating and can contribute to ratings downgrades even when they do not reflect material financial risks to the IDI. The Proposal would clarify that specialty review findings would influence CAMELS ratings only “to the extent that the findings impact an IDI’s overall financial condition, represent material financial risks, or reflect significant noncompliance with laws and regulations.” The Proposal states that this change would promote component and composite ratings that better reflect material financial risks.

Composite and Component Ratings Definitions

The current CAMELS rating system includes definitions for composite ratings 1 through 5, which provide supervisors with specific considerations in determining the ratings. The Proposal would revise the composite rating definitions to “establish[] clearer thresholds for these ratings” and “help ensure that ratings of 3 or worse are more fully supported by evidence of weaknesses that materially impact the safety and soundness of the institution.” In particular, the Proposal would delete certain qualitative descriptions from the composite rating definitions and:

• Revise the composite 1 and 2 definitions to clarify that IDIs with these ratings have “strong financial performance” or “satisfactory financial performance,” respectively, and have only “minor” or “moderate” risk management weakness.
• Revise the composite 3 definition to state that IDIs with this rating exhibit “less than satisfactory financial performance or inadequate risk management practices that result in material financial risk to the institution” or exhibit “significant noncompliance” with laws and regulations. The Proposal states that these IDIs “require more than normal supervision, which may include formal or informal enforcement actions,” though “[f]ailure appears unlikely.”
• Revise the composite 4 definition to state that IDIs with this rating exhibit “deficient financial performance.” The Proposal states that risk management weaknesses that do not result in observable deterioration of financial condition or material financial risk would not alone support a composite rating of 4 or worse.
• Revise the composite 5 definition to state that IDIs with this rating exhibit “critically deficient financial performance.”

The current CAMELS rating system also includes a description of the ratings, 1 through 5, for each component, but these descriptions are not standardized. The Proposal would update the existing descriptions to “introduce more consistent terminology and a more streamlined structure, focusing on the financial condition and risk management aspects” of the rating definitions, where applicable. The Proposal would:

• More consistently use the terms “strong,” “satisfactory,” “less than satisfactory,” “deficient” and “critically deficient” to describe IDIs’ financial condition in the ratings definitions for each CAMELS component.
• Use the terms “effective,” “adequate,” “inadequate” and “deficient” to describe risk management practices.
• Remove specific descriptions of risk management practices for all five ratings for all components except for the Management component.

Risk Management Language in the Component Descriptions and Evaluation Factors

The Proposal would remove language currently included in the non-Management components (i.e., CAELS) descriptions and evaluation factors that focuses on the “ability of management to identify, measure, monitor, and control” risks (emphasis added). The Proposal would instead add language to evaluate the “institution’s overall financial condition” and the institution’s “effectiveness,” with specific consideration of metrics that do not explicitly incorporate consideration of management’s abilities. For example, the Proposal would replace language regarding management’s ability to “properly identify, measure, monitor, and control the institution’s liquidity position” in one of the Liquidity component’s evaluation factors with language that speaks to “[t]he effectiveness of funds management practices.”

The Proposal would retain language in the Management component description regarding “management’s ability to identify, measure, monitor and control” risks, but would clarify that this language refers only to “material financial risks.”

Evaluation Factors

Under the current CAMELS rating system, the component descriptions provide that the rating for each component will be “based upon, but not limited to,” an assessment of the listed evaluation factors. The Proposal would remove this language from the component descriptions. Instead, the Proposal would include a single paragraph applicable to all components that would allow for additional evaluation factors to be “considered only if warranted by exceptional circumstances or evolving business practices.” Such consideration of additional evaluation factors would be required to be “critical to the assessment of an institution’s financial condition or risk profile with emphasis on material financial risks.” Examiners would be required to document and explain the rationale for inclusion of such additional factors. The FFIEC states that this aspect of the Proposal is intended to provide greater certainty and transparency regarding the rating evaluation factors that will be considered in the assessment of an IDI.

In addition, the Proposal would “more clearly defin[e]” certain evaluation factors “to further standardize evaluations and better ensure that examiners and [IDIs] prioritize issues that materially affect an institution’s financial condition and risk profile.” For example, the Proposal would clarify that risks related to contingent liabilities would be considered in the evaluation factors for the Capital Adequacy component.

Other Conforming Updates

Finally, the Proposal would update the terminology throughout the CAMELS rating system “to reflect current industry standards and accounting practices,” such as by changing references to “allowances for loan and lease losses” to “allowances for credit losses,” to conform with the Current Expected Credit Losses accounting standard adopted under U.S. GAAP in 2023. In addition, the Proposal would remove references to reputation risk, consistent with the policies of the Federal Reserve Board, OCC, FDIC, and NCUA.[15]

Questions for Comment

The FFIEC requested comment on all aspects of the Proposal and posed 11 specific questions for comment. The 11 questions request feedback on topics including:

• How “compliance with laws and regulations” should be “considered within the composite and component ratings”;
• The agencies’ approach to “‘evolving business practices’ in determining additional evaluation factors that are critical to an assessment of an [IDI]’s financial condition or risk profile with emphasis on material financial risks”;
• Whether commenters agree with “limit[ing] inclusion of specialty review findings . . . to those that impact an [IDI’s] overall financial condition or pose material financial risk”;
• To what extent the Proposal “appropriately balance[s]” consideration of an IDI’s “financial condition and risk profile when assigning ratings”;
• To what extent the Management component’s evaluation factors should “directly consider whether compensation is excessive”;
• To what extent the Management component’s evaluation factors should consider whether directors and management “are affected by, or susceptible to, dominant influence or concentration of authority”; and
• Whether the Proposal’s changes to the Management component rating “effectively limit consideration of a single finding when assigning multiple ratings.”

Implications and Next Steps

The Proposal would significantly deemphasize the Management component within the CAMELS rating framework, but would not eliminate or dramatically reform the component, despite some calls for more substantial change. The Proposal would also make other changes to the manner in which the rating system is applied to re-focus on material financial risks and an IDI’s financial condition and risk profile.

If the Proposal is finalized, the FFIEC’s member supervisory agencies will still need to act to adopt the proposed revisions into their processes for assigning CAMELS ratings.[16] In connection with the 1996 update to the rating framework, the FFIEC set a target implementation date for the agencies to each individually implement the updates within a few weeks of their finalization; that implementation was accomplished without a rulemaking by the member agencies that chose to adopt it at that time.[17]