For the first time in 30 years, the rating system used to assess the safety and soundness of financial institutions is undergoing an overhaul with the intent to improve transparency and predictability, establish quantitative measures, and identify material financial risk. Financial institutions should understand the proposed changes and take steps to prepare.
At a Glance
The FFIEC has proposed revisions to the Uniform Financial Institutions Rating System, commonly known as CAMELS. The proposal would retain the six CAMELS components but revise certain composite and component rating definitions and evaluation factors, reduce the special consideration historically given to the management component when assigning composite ratings, and focus supervisory ratings more directly on material financial risk. Financial institutions should review whether internal audit, risk assessment, and board reporting clearly connect governance and control findings to measurable impacts on financial condition and safety and soundness.
The CAMELS Framework Rating System
Since 1978, the Federal Financial Institutions Examination Council (FFIEC) has prescribed standards for financial institutions to promote consistency and coordination across regulatory agencies. In 1979, these standards were adopted as the Uniform Financial Institutions Rating System (UFIRS), commonly known as CAMELS.
The rating system, CAMELS, is used to evaluate the safety, soundness, and financial health of institutions across six components:
- Capital adequacy
- Asset quality
- Management
- Earnings
- Liquidity
- Sensitivity to market risk
Each component is assigned a rating from 1 to 5 based on the institution’s condition and performance. Once each component is scored, the financial institution is given an overall composite rating.
Need for Framework Revisions
Regulators have expressed concern that the management component has, at times, had a disproportionate influence on composite CAMELS ratings. As part of its May 2026 proposal, the FFIEC stated that revisions are intended to strengthen the connection between CAMELS ratings and factors that materially affect an institution’s financial condition and risk profile while improving transparency and consistency in supervisory outcomes.
Clarity on the Proposed Changes
The proposed changes are numerous, but the key takeaway is the possible removal of the “special consideration” historically given to the management component when determining the composite rating. The goal of this change is for the composite rating to more accurately reflect the financial institution’s overall health and not be overly influenced by subjectivity.
The proposal also reflects a broader emphasis on material financial risk. Under the revised framework, supervisory evaluations would focus more directly on risks that could materially affect an institution’s financial condition and risk profile. As a result, factors such as reputational concerns would generally be considered within the rating process only to the extent they create or contribute to measurable financial risk. This aspect of the proposal has generated discussion among industry participants regarding the appropriate role of reputational considerations in supervision.
The proposed changes also include updates to the composite rating definitions, with the same goal of better reflecting the company’s financial condition and emphasizing the material risks. Additionally, the changes describe plans to clarify what evaluation methods would be factored in and ways to modernize the language used in the UFIRS framework.
Debate Surrounding the Proposed Management Rating Changes
The proposed change to the management component is gaining much attention. Some state a subjective element is needed in the rating system to identify underlying management issues, but others say a focus on more quantitative factors can lead to a better indication of financial health.
Some industry participants argue that supervisory assessments of management remain an important indicator of an institution’s long-term condition. They contend that weaknesses in governance, internal controls, strategic planning, or risk management may emerge before measurable financial deterioration becomes evident. From this perspective, reducing the influence of the management component could limit regulators’ ability to identify and address emerging risks at an early stage.
Supporters of the proposal argue that CAMELS ratings should primarily reflect factors that have a demonstrable impact on an institution’s financial condition. They contend that placing greater emphasis on measurable financial risk may improve consistency across examinations and make ratings more predictable and transparent. Proponents also note that governance and risk-management concerns would continue to be evaluated under the revised framework; although, their influence on the composite rating may change.
What the Changes Could Mean for Financial Institutions
While the proposal would retain the CAMELS framework’s six core components, it could affect how institutions are evaluated during examinations. By placing greater emphasis on material financial risk and reducing the special consideration historically given to the management component in composite ratings, the proposal may change how governance, risk management, and control activities are assessed within the supervisory process.
Institutions should not view the proposal as diminishing the importance of governance or risk management. Instead, the proposed revisions may increase expectations that institutions demonstrate how those practices contribute to measurable financial outcomes and mitigate material risk. As a result, boards, management teams, and internal audit functions may benefit from evaluating whether current reporting clearly links identified risks to the institution’s financial condition and overall safety and soundness.
Steps to Prepare for the Changes
Financial institutions should take steps to prepare for potential changes to the CAMELS rating system:
- Review the proposed revisions to understand how potential changes to the management component and composite rating methodology could affect the institution’s CAMELS profile
- Assess internal audit and risk assessment processes to ensure significant findings identify not only control weaknesses but also their potential impact on the institution’s financial condition and risk profile
- Identify areas that rely heavily on qualitative assessments and consider whether supporting metrics or risk indicators could provide additional evidence of effectiveness
- Evaluate whether board and management reporting clearly identifies risks that could materially affect capital, earnings, liquidity, or asset quality
- Review governance and risk management reporting to determine whether key practices are supported by measurable performance indicators
For many institutions, the practical challenge may not be changing governance or risk management practices but demonstrating how those practices influence measurable financial outcomes. Institutions that can clearly connect governance decisions, risk management activities, and audit findings to financial condition may be better positioned under the proposed framework.
Regardless of whether the proposal is adopted as drafted, it signals an important shift in supervisory thinking toward measurable financial outcomes and material risk.
Having a strong internal audit and risk assessment function is key. PYA experts have provided these services for over four decades and understand the challenges financial institutions face. We have extensive experience in internal audit, risk assessment, governance reporting, and financial institution regulatory readiness to help financial institutions navigate a complex regulatory environment.
Sources
Material Loss Review of Silicon Valley Bank
Federal Register: Uniform Financial Institutions Rating System
