FFIEC Proposes Changes to the CAMELS Rating System

05/20/26

Federal banking regulators last week proposed one of the most significant changes to the CAMELS supervisory rating framework in decades, signaling a major shift toward a more transparent and risk-focused examination process. The proposal, issued through the Federal Financial Institutions Examination Council (FFIEC), would revise the Uniform Financial Institutions Rating System to place greater emphasis on material financial risk and reduce the weight given to process-oriented findings, documentation issues, or technical deficiencies that do not meaningfully threaten a bank's safety and soundness.

For banks, this proposal matters because CAMELS ratings drive far more than just examination outcomes. Ratings can impact merger approvals, branch applications, enforcement actions, dividend flexibility, access to expansion opportunities, deposit insurance assessments, and whether a bank is considered "well managed" under federal law. Community banks have long argued that the current framework often allows subjective examiner criticism or isolated process findings to disproportionately influence ratings, even when the institution itself remains financially sound. Regulators now appear to be acknowledging those concerns.

The proposal would retain the traditional CAMELS structure - Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk - but substantially revise how those components are evaluated and weighted. Regulators stated the goal is to better align ratings with actual financial condition and material supervisory concerns rather than administrative or procedural weaknesses.

One of the most important proposed changes involves the "M" component for Management. Historically, many banks have viewed the Management rating as the most subjective portion of the exam process. Under the proposal, banks generally would not receive a Management rating of "3" or worse unless risk management weaknesses create material financial risk to the institution. The agencies specifically noted concerns that Management ratings have often "double counted" issues already reflected elsewhere in the CAMELS framework. The proposal attempts to narrow that practice significantly.

The agencies are also proposing changes to how specialty examination findings affect CAMELS ratings. Under the current system, findings from areas such as BSA/AML, consumer compliance, CRA, information technology, trust, or other specialty reviews can materially influence a bank's Management or composite rating even when those issues are operational in nature and not tied to the bank's financial condition. Under the revised framework, those findings would impact ratings primarily when they create material financial risk, significantly affect the institution's condition, or involve substantial violations of law or regulation.

In practical terms, this could represent a meaningful change for many OBL members. A bank that receives criticism over policies, procedures, documentation, committee minutes, or isolated compliance processes may be less likely to experience an automatic downgrade absent a demonstrated connection to financial deterioration, unsafe practices, or significant legal violations. Examiners would still identify and require correction of issues, but the proposed framework appears designed to reduce the likelihood that non-material findings alone drive adverse ratings outcomes.

The proposal also seeks to improve consistency and predictability across examination teams and agencies. Regulators specifically referenced increasing transparency and reducing supervisory uncertainty as major goals of the revised framework. Federal Reserve Vice Chair for Supervision Michelle Bowman described the proposal as a shift toward "transparency, quantitative factors, and predictability of supervisory oversight."

Importantly, the proposal does not eliminate supervisory expectations or reduce the importance of strong governance and controls. Banks will still be expected to maintain sound compliance management systems, appropriate internal controls, effective risk management, and strong operational practices. However, the proposal would create a clearer distinction between supervisory findings that require corrective action and findings serious enough to warrant a ratings downgrade.

For OBL members, this proposal aligns with many of the broader "regulatory right-sizing" themes the industry has advocated for years. Banks have consistently argued that examinations should focus primarily on actual financial and prudential risk rather than examiner preferences, evolving "best practices," or procedural technicalities that do not materially threaten safety and soundness. The proposal appears to reflect a growing recognition among regulators that supervisory frameworks should be more tailored, transparent, and grounded in measurable financial risk. The proposal is not yet final. The agencies are accepting public comment for 90 days following publication in the Federal Register, and additional revisions could occur before implementation. OBL will continue reviewing the proposal closely and engaging with regulators throughout the comment process to ensure the final framework provides greater consistency, fairness, and transparency for Ohio banks.