In 1979, the members of the four banking agencies (under the guidance of the Federal Financial Institutions Examination Council) adopted the Uniform Financial Institutions Rating System (UFIRS), commonly known as the CAMEL rating system. In 1997, the Board of Governors of the Federal Reserve System revised the CAMEL rating system to include a sixth component, Sensitivity to Market Risk. The primary purpose of the CAMELS ratings is not to identify future bank failures, but for the regulators to provide an assessment of a bank’s overall condition. It should be noted that the CAMELS ratings given to banks are not released to the public. The ratings are used by upper management to understand and regulate possible risks. One of the main reasons why CAMELS ratings are not released to the public is to prevent a potential “ run on the bank” for a bank that has been downgraded.
The National Credit Union Administration adopted the CAMEL ratings in 1987. The “S” rating will take effect in April 2022.
There are six categories which make up the CAMELS ratings and each is rated on a scale from one to five, one being the best rating and five being the worst rating. The lower rating indicates more financial stability and less risk.
CAMELS ratings can expose a financial institution to any of the informal and formal enforcement actions available to regulators. Informal enforcement actions often warrant less serious actions and are internal to the bank, not known to the public. Formal enforcement actions are generally for serious infractions to correct some type of unlawful, unsafe, or unsound practice; they are disclosed to the public and are authorized by statute and enforceable in federal courts. Types of enforcement actions can include: Memorandums of Understanding, Consent Orders, Cease and Desists Orders, Written Agreements, and Directive Actions. In the end, enforcement actions can affect a bank's access to capital, insurance cost, and difficulty to recruit and maintain talent.
In some instances, enforcement actions can be costly to the bank and individuals at the bank. Money and resources may need to be spent to correct the problem/s identified by the regulators. There is also the reputational aspect of being the target of an enforcement action.