Safety and Soundness Examination Ratings
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 CAMEL Ratings
- Federally examined banks are rated using the
interagency Uniform Financial Institutions Ratings System UFIRS
Originally this rating system, referred to industry-wide by the acronym
"CAMEL", evaluated five components
- Capital adequacy
- Asset quality
- Management and administration
- Earnings
- Liquidity
- Recently, the UFIRS was revised and updated to
address changes in the financial services industry and in supervisory policies
and procedures. The revisions include the addition of a sixth component
addressing sensitivity to market risks, explicit reference to the quality of
risk-management processes in the management component, and identification of
risk elements within the composite and component rating descriptions.
It is still referred to, however, as the CAMEL rating
- The UFIRS considers certain financial,
managerial, and compliance factors that are common to all institutions. Under
this system, the supervisory agencies endeavor to ensure that all financial
institutions are evaluated comprehensively and uniformly and that supervisory
attention is appropriately focused on the financial institutions exhibiting
financial and operational weaknesses or adverse trends
Explanation
of the Specific
Ratings
 Overview
- Under the UFIRS, each financial institution is
assigned a composite rating based on an evaluation and rating of six essential
components of its financial condition and operations. These component factors
address the adequacy of capital, quality of assets, capability of management,
quality and level of earnings, adequacy of liquidity, and sensitivity to market
risk. Evaluations of the components take into consideration the institutions
size and sophistication, the nature and complexity of its activities, and its
risk profile
- Composite and component ratings are assigned
based on a 1-to-5 numerical scale. A 1 is the highest rating, indicating the
strongest performance and risk-management practices and the least degree of
supervisory concern. A 5 is the lowest rating, indicating the weakest
performance, inadequate risk-management practices, and the highest degree of
supervisory concern
- The composite rating generally bears a close
relationship to the component ratings assigned. However, the composite rating is
not derived by computing an arithmetic average of the component ratings. Each
component rating is based on a qualitative analysis of the factors that make up
that component and its interrelationship with the other components. When
assigning a composite rating, some components may be given more weight than
others depending on the situation at the institution. In general, assignment of
a composite rating may incorporate any factor that bears significantly on the
overall condition and soundness of the financial institution. Assigned composite
and component ratings are disclosed to the institutions board of directors and
senior management
- The ability of management to respond to changing
circumstances and address the risks that may arise from changing business
conditions or the initiation of new activities or products is an important
factor in evaluating a financial institutions overall risk profile, as well as
the level of supervisory attention warranted. For this reason, the management
component is given special consideration when assigning a composite rating
- For less complex institutions engaged solely in
traditional banking activities and whose directors and senior managers, in their
respective roles, are actively involved in the oversight and management of
day-to-day operations, relatively basic management systems and controls may be
adequate. At more complex institutions, detailed and formal management systems
and controls are needed to address their broader range of financial activities
and to provide senior managers and directors, in their respective roles, with
the information they need to monitor and direct day-to-day activities
- Examiners consider foreign branch and specialty
examination findings and the ratings
assigned to those areas, as appropriate, when
assigning component and composite ratings
under UFIRS
- The specialty examination areas include
Compliance, Community Reinvestment, Government Security Dealers, Information
Systems, Municipal Security Dealers, Transfer Agent, and Trust
Composite 1
SEC_CODE_REF_0090001192884
- Financial institutions with a composite 1 rating
are sound in every respect and generally have components rated 1 or 2
- Any identified weaknesses
are minor and can be handled routinely
by the board of directors and management.
- These financial institutions are the most capable
of withstanding fluctuating business conditions and are resistant to outside
influences, such as economic instability in their trade area
- These institutions are in substantial compliance
with laws and regulations. As a result, they exhibit the strongest performance
and risk-management practices relative to their size, complexity, and risk
profile, and give no cause for supervisory concern
Composite 2
- Financial institutions with a composite 2 rating
are fundamentally sound. For a financial institution to receive this rating,
generally none of its component ratings should be more severe than 3
- Only moderate weaknesses are present, and the
board of directors and management are capable of and willing to correct them
- These financial institutions are stable, can
withstand business fluctuations, and are in substantial compliance with laws and
regulations. Overall risk-management practices are satisfactory relative to the
institutions size, complexity, and risk profile. There are no material
supervisory concerns and, as a result, the supervisory response is informal and
limited
Composite 3
- Financial institutions with a composite 3 rating
exhibit some degree of supervisory concern in one or more of the component areas
- These institutions have a combination of moderate
to severe weaknesses; however, the magnitude of the deficiencies generally will
not cause a component to be rated more severely than 4
- Management may lack the ability or willingness to
effectively address weaknesses within appropriate timeframes. Financial
institutions in this group generally are less capable of withstanding business
fluctuations and are more vulnerable to outside influences than those
institutions rated a composite 1 or 2
- Additionally, these financial institutions may be
in significant noncompliance with laws and regulations. Risk-management
practices may be less than satisfactory relative to the institutions size,
complexity, and risk profile. These financial institutions require more than
normal supervision, which may include formal or informal enforcement actions
- Failure of the institution appears unlikely,
however, given its overall strength and financial capacity
Composite
4
- Financial institutions with a composite 4 rating
generally exhibit unsafe and unsound practices or conditions.
- They have serious financial or managerial
deficiencies that result in unsatisfactory performance. The institutions
problems range from severe to critically deficient, and weaknesses and problems
are not being satisfactorily addressed or resolved by the board of directors and
management
- Financial institutions in this group generally
are not capable of withstanding business fluctuations. There may be significant
noncompliance with laws and regulations. Risk-management practices are generally
unacceptable relative to the institutions size, complexity, and risk profile
- Close supervisory attention is required, which
means formal enforcement action is necessary in most cases to address the
problems. Institutions in this group pose a risk to the deposit insurance fund
- Failure of the institution is a distinct
possibility if the problems and weaknesses are not satisfactorily addressed and
resolved
Composite
5
- Financial institutions with a composite 5 rating
exhibit extremely unsafe and unsound practices or conditions.
- Their performance is critically deficient and
risk-management practices are inadequate relative to the institutions size,
complexity, and risk profile
- These institutions are of the greatest
supervisory concern. The volume and severity of problems are beyond
managements ability or willingness to control or correct. Immediate outside
financial or other assistance is needed for the financial institution to be
viable. Ongoing supervisory attention is necessary
- Institutions in this group pose a significant
risk to the deposit insurance fund and their failure is highly probable
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