Banking Agencies Propose Major Changes to How Financial Institutions Are Rated

The federal banking agencies—the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board (FRB)—and the National Credit Union Administration (NCUA) (the Agencies) have proposed major revisions to the way they grade and examine the more than 8,500 financial institutions subject to their supervision. The proposal marks the first major revision to the Uniform Financial Institutions Rating System, commonly known as the CAMELS ratings, since 1996.

The Agencies apply highly confidential numerical CAMELS ratings to each bank, savings association, and credit union, from the smallest institutions to global systemically important banks. The ratings have significant consequences for the way those institutions are permitted to operate. The proposal will keep the existing structure of the rating system but reorient it toward controlling material financial risks.

CAMELS RATING SYSTEM AND ITS CONSEQUENCES

The Agencies conduct examinations to evaluate financial institutions on the following six components:

• C – Capital
• A – Asset Quality
• M – Management
• E – Earnings
• L – Liquidity
• S – Sensitivity to Market Risk

Each of the components is rated from 1 to 5, with 1 indicating strong performance or condition and 5 indicating critical deficiencies that could threaten a financial institution’s continued viability. A rating of 3 is unsatisfactory. The supervisory staff of the Agencies then use the component ratings to determine an institution’s overall composite rating. Determining the composite rating is not an averaging exercise but instead a function of supervisory judgment. Under current guidance, the Management rating is given “special consideration” and has an outsized effect on determining the composite rating.[1]

The impact of CAMELS ratings on the operations of financial institutions is substantial. Ratings of 3, 4, or 5 lead to restrictions on an institution’s ability to engage in transactions, increased regulatory costs, including higher charges for deposit or share insurance, and informal or formal enforcement actions by the Agencies.[2] This proposal does not change the effect of poor CAMELS ratings—it instead reorients the ratings to have a narrower and clearer focus.

FOCUS ON MATERIAL FINANCIAL RISKS

The proposal would concentrate the ratings, both composite and component, on control of “material financial risk,” a phrase that appears 38 times in the proposal but is not used in the current CAMELS rating system. The purpose of the change is to focus the ratings system, the financial institutions, and Agency examinations on factors that materially affect an institution’s risk profile or financial condition, instead of concerns related to policies, procedures, or documentation. The Agencies believe that these changes will improve the effectiveness and transparency of the ratings by more accurately evaluating issues most likely to affect an institution’s safety and soundness and by more clearly articulating supervisory expectations.

The proposal also limits consideration of the “specialty review findings and ratings”—ratings outside the six CAMELS components—including Bank Secrecy Act, Consumer Compliance, Trust, and Information Systems. Specialty ratings will be relevant to setting component or composite ratings only to the extent that they impact an institution’s overall financial condition or pose material financial risk.[3]

This proposal mirrors broader efforts by the banking agencies following Silicon Valley Bank’s failure in March 2023 to reduce subjectivity in bank supervision and refocus on financial risks.[4] In an earlier regulatory proposal, the FDIC and OCC proposed limiting the supervisory criticisms that take the form of Matters Requiring Attention to material financial risk or substantive legal violations.[5] That proposal was not joined by the FRB, and the FDIC and OCC have yet to finalize it as of June 2026.

MANAGEMENT RATING OVERHAULED AND DEEMPHASIZED

The proposal’s revised Management rating definition removes several current evaluation factors in an effort to again focus on risk and to limit overlap between the Management rating and the other five components. The proposal removes consideration of responsiveness to auditor and supervisory recommendations, management depth and succession, willingness to serve the banking needs of the community, and the overall performance of the institution (which caused every other component rating to be relevant to both the Management and the composite rating). The Management rating under the current system was often seen as a catchall that incorporated ill-defined examiner criticisms or repeated the most severe criticisms already encapsulated in other component or specialty ratings.[6]

While the proposed revisions try to increase the analytical rigor of the Management rating and decrease the overlap with other components, for the head of the OCC, the proposal did not go far enough. The Comptroller of the Currency issued a separate statement to make clear his concerns:

While I support the direction of this proposal, I remain concerned that the revisions do not sufficiently address “double counting” within the Management, or M, component. For the CAMELS framework to function effectively, each component must provide distinct, incremental value. Historically, the Management rating has reflected deficiencies already captured in other components. 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.[7]

—Jonathan V. Gould, Comptroller of the Currency

Additionally, the new composite rating definition would remove language requiring “special consideration” of the Management rating or of management’s “willingness and ability” to address issues. The proposed definition for the composite rating focuses on financial performance, material financial risk, and substantive compliance with laws.

COMMENT LETTERS SO FAR

The Agencies have received a few dozen comment letters, which range from praise to skepticism. Several letters raise a general concern that the proposed revisions are part of efforts by the current administration to reduce scrutiny on financial institutions. Others express support for the proposal as both overdue and well-calibrated to focus on risks. One of the more substantive criticisms argues that the focus on material financial risk could replace forward-looking examiner judgment with the lagging indicator of financial materiality.

Specific comments include suggestions that IT or a Technology rating become a prominent and standalone CAMELS component,[8] that revisions to Management still risk double counting (echoing Comptroller Gould’s concerns), that composite ratings should be made public after a period of 90 or 180 days, and that community banks should be exempted from any change to the ratings system.

Comments are due by August 17, 2026.