Inside Financial Services

The CAMELS’ Broken Back

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This spring, Greg Baer and Jeremy Newell of The Clearing House published a banking perspective piece, “How Bank Supervision Lost Its Way,” highlighting the increased regulatory attention spent on bank supervision rather than formal regulation. Not only does this hurt the banking industry, it’s holding back our economy. Let’s discuss!

Since 1979, the CAMELS rating system has served as the regulatory benchmark for FDIC assessment of the safety and soundness of banking institutions. Congress—ultimately, the taxpayer–has a special interest in the financial condition of insured institutions, as bank deposits are insured by the FDIC. And so, for 40 years the CAMELS system (short for Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity) was used to evaluate the financial condition of insured institutions. Remarkably, despite incredible change in the financial system since the 1970s the CAMELS standards have remained largely unchanged.

But in the wake of the financial crisis, the Federal Reserve, along with a dozen other agencies, rolled out a host of more detailed, complex regulation. (A partial list: DFAST/CCAR, TLAC, GSIB, RWA, and Leverage Ratio all relate to capital; LCR and  NSFR address liquidity. Then there’s the Volcker Rule and broad resolution plans.) These measures were intended to better protect the safety and soundness of the financial system. But rather than replace the CAMELS system, these new rules have overlay a complex web of new regulatory requirements onto a pre-existing system. The result is enormously complex. I challenge you to make sense of the chart below.



Rather than decrease the importance of CAMELS in the supervisory process given its diminished role in testing financial condition, supervisors are using the CAMELS to emphasize the one subjective component: bank management. More specifically, to ensure bank management teams “comply” with regulatory guidance and examiner criticism.



Because CAMELS management rating no longer hinges on the financial condition (i.e. safety and soundness) of the bank, the examination process has increasingly become an evaluation of routine compliance matters and the degree to which management appeases examiner criticism. If an examiner doesn’t like a particular banker’s temperament, there could be a host of consequences ranging from AML consent orders to a CRA rating that “needs improvement.”

The End-Game: Bankers in the Penalty Box

As of January 2017, regulators had a total 236 outstanding actions against 222 institutions. Roughly 10% of outstanding actions were against institutions greater than $100 billion in total assets, meaning that more than 40% of institutions greater than $100 billion were under some form of regulatory actions. While these 57 institutions, account for only 0.61% of total number U.S. banks and thrifts, they account for greater than 75% of the industry’s total assets. The result: one-third of the industry is blocked from branch expansion, M&A, or growth in specific business lines. Instead of reinvesting and innovating to meet customer needs, bank management teams are spending to address back-office compliance and constantly fighting a variety of civil and criminal liabilities brought on by state and federal authorities. When it will end remains uncertain, but the strength of our economy depends on it.

What do you think? Let me know!

5 Responses to “The CAMELS’ Broken Back”

  1. Milton Joseph

    Tom –

    As you are most certainly aware, in 1997, I sold my my proprietary bank rating system to Bankrate, Inc. and monitored the methodology and results through the ensuing eleven years. The system graded Insured banks, thrifts, and credit unions on a 5-Star baisis (CAEL 1 -CAEL 5) and incorporated NO Subjectivity.

    We should talk.

    Milton R. Joseph

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  3. Anonymous

    My comment is a few days late, but in regards to CAMELS, I love the fact that we are still told to keep the ratings confidential, or there will be dire consequences, but the stress test results become public knowledge immediately! Ed Garding

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