For the first time in 30 years, federal bank regulators are proposing a major overhaul to the CAMELS supervisory rating system, the 1–5 score regulators use to grade a financial institution’s health.
CAMELS, nicknamed for the six components it evaluates — capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk — is the framework of the Uniform Financial Institutions Rating System, the supervisory tool the Federal Financial Institutions Examination Council adopted in 1979 to evaluate, rate, and communicate the soundness of financial institutions, as well as identify those needing heightened attention or supervisory action. .
Regulators last updated UFIRS and CAMELS in 1996, following significant shifts in financial markets, interest rate volatility, and financial instruments. This time, they’re seeking to improve effectiveness and increase the public’s confidence in supervisors’ assessment of the banking system by modifying rating definitions and evaluation factors. Their goal: to strengthen the link between the ratings and a financial institution’s safety and soundness by prioritizing material financial risks over concerns related to policies, procedures, and documentation.
CAMELS: 3 Major Changes Proposed
First, updates would align terminology with current industry standards and accounting practices. For example, references to “allowances for loan and lease losses” (ALLL) would be replaced with “allowances for credit losses” (ACL) to conform with the Current Expected Credit Losses (CECL) accounting standard adopted under U.S. GAAP in 2023.
Second, all references to reputation risk would be removed, consistent with the policies of the Federal Reserve Board, OCC, FDIC, and NCUA.
Third, updates would improve transparency by more clearly articulating expectations for financial institutions. Numerical ratings from 1 to 5 — with 1 being the highest and 5 the lowest — would remain unchanged. The proposed updated definitions for component and composite rankings are summarized below.
Proposed Changes to Component Rating Definitions
Capital Adequacy: Replace the evaluation factor concerning “the ability of management to address emerging needs for additional capital” to include consideration of “the institution’s effectiveness in maintaining capital levels commensurate with its risk profile and strategic priorities through a range of economic conditions.”
Asset Quality: Eliminate broad language that requires examiners to evaluate the ability of management and the board to “identify, measure, monitor, and control” risk to instead focus on evaluation of credit risks associated with a financial institution’s loan and investment portfolios; foreclosed, repossessed, and other assets; and off-balance sheet exposures.
Management: Remove the sentence directing examiners to give “special consideration” to the Management component in the composite rating, ensuring supervisors take a more balanced approach. Remove 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 instead focus on material aspects of risk management, as well as establish a material financial risk threshold for Management ratings of 3 or worse.
Earnings: Clarify that a financial institution’s funding costs and earnings exposure to commodity prices would be considered when evaluating the quality, quantity, and trend of a financial institution’s earnings.
Liquidity: Focus on “the effectiveness of funds management practices, including contingency funding plans and cash flow forecasting” to ensure a financial institution is able to maintain sufficient liquidity to meet its financial obligations in a timely manner.
Sensitivity to Market Risk: Amend the language to include an evaluation of recent net interest income performance in response to the interest rate environment, expectations for net interest income based on the balance sheet position, and exposure to interest rate volatility.
Proposed Changes to Composite Rating Definitions
Financial institutions receive a composite rating based on ratings for the components noted above, which would be redefined as follows:
Composite 1: Sound in every respect. Strong financial performance. Minor risk management weaknesses. In substantial compliance with laws and regulations. No cause for supervisory concern.
Composite 2: Fundamentally sound and no component rating more severe than 3. Satisfactory financial performance. Moderate risk management weaknesses that do not result in material financial risk. In substantial compliance with laws and regulations. No material safety and soundness concerns.
Composite 3: Some supervisory concern and no component rating above 4. Less than satisfactory financial performance or inadequate risk management practices that result in material financial risk to the institution. Significant noncompliance with laws and regulations. Requires more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely.
Composite 4: Significant supervisory concern. Deficient financial performance. Risk management weaknesses range from severe to critically deficient. Significant noncompliance with laws and regulations that represent material financial risk. Close supervisory attention is required, including formal enforcement action. Risk of loss to the Deposit Insurance Fund or Share Insurance Fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved.
Composite 5: Highest supervisory concern. Critically deficient financial performance. Immediate outside financial or other assistance is needed for the institution to be viable. Ongoing supervisory attention is necessary. Significant risk of loss to the Deposit Insurance Fund or Share Insurance Fund, and failure is highly probable.
Potential Benefits of the Proposed Changes
The proposal could result in more efficient and effective use of management time and resources. More transparency in supervisory expectations could lead to reduced compliance costs to address any material risks, improving the institution’s safety and soundness. Also, financial institutions with satisfactory CAMELS ratings have historically demonstrated higher lending and better overall bank performance, while those with poor CAMELS ratings exhibit substantially lower loan growth.
Potential Costs of the Proposed Changes
Risk management practices that do not drive CAMELS ratings or are not perceived to be directly linked to material financial risk could drop in priority. If the proposed changes delay the identification and remediation of a risk that causes the financial institution to further deteriorate and later materially affect financial condition, then the proposed changes could lead to higher costs to deal with the risk, as well as financial losses.
Public comments are due Aug. 17, 2026.
Stay on top of the latest developments related to CAMELS and other supervisory agency updates — get an in-depth review and evaluation of your institution’s strengths, weaknesses, and opportunities, essential to guiding strategic decisions that maximize growth and earn the highest supervisory ratings. Contact Kristy Clark at [email protected] for a personal conversation.