In developing the proposal, the FFIEC conducted a review of the framework that considered academic literature, existing industry commentary and an analysis of CAMELS ratings data from 2000 to 2025.
On May 19, 2026, the Federal Financial Institutions Examination Council (FFIEC) published a notice and request for comment proposing significant revisions to the Uniform Financial Institutions Rating System (UFIRS), commonly referred to as the CAMELS rating system. The proposal represents the first material revision to the CAMELS framework in 30 years, marking a decisive shift toward transparency, quantitative factors and predictability in supervisory oversight. Comments on the proposal are due by August 17, 2026.
Background
The CAMELS rating system evaluates the safety and soundness of financial institutions by assigning a composite rating and six component ratings—capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk—on a scale of 1 to 5, with 1 being the highest rating. The FFIEC first adopted the framework in 1979 and last modified it in 1996, when a sixth component for sensitivity to market risk was added and greater emphasis was placed on risk management practices.
In developing the proposal, the FFIEC conducted a review of the framework that considered academic literature, existing industry commentary and an analysis of CAMELS ratings data from 2000 to 2025. FFIEC Chair Michelle W. Bowman, who is also vice chair for supervision of the Federal Reserve Board, prioritized this comprehensive revision and stated that the revised framework "marks a decisive shift toward transparency, quantitative factors, and predictability of supervisory oversight."
Summary of Proposed Changes
The proposal would retain the basic framework of the existing rating system but modify the composite and component rating definitions and evaluation factors to emphasize factors that materially affect an institution's financial condition and risk profile. The FFIEC characterized the proposal as shifting the emphasis away from concerns related to policies, procedures and documentation and toward material financial risks most likely to impact safety and soundness.
Removing "Special Consideration" for the Management Rating
Under the current framework, the management component is given special consideration when assigning a composite rating. The proposal would remove this directive so that supervisors take a more balanced approach that appropriately considers all component ratings when determining the composite. This change is intended to result in a composite rating that better reflects a financial institution's overall financial condition and risk profile, rather than being disproportionately driven by a single component.
Changes to the Management Component Rating
The proposal would make several changes to the management component's evaluation factors and rating definitions. Specifically, the proposal would remove evaluation factors related to "Management depth and succession," "Responsiveness to recommendations from auditors and supervisory authorities" and "Demonstrated willingness to serve the legitimate banking needs of the community" in order to focus the management component on the most material aspects of risk management. The proposal would also establish a material financial risk threshold for assigning management ratings of 3 or worse based on risk management weaknesses, meaning institutions would generally receive such ratings only when risk management practices result in material financial risk to the institution. Institutions with unreliable financial or regulatory reporting, failures to safeguard assets or significant noncompliance with law or regulation may also be assigned a management component rating of 3 or worse.
Treatment of Specialty Review Findings
Under the current framework, supervisory findings from specialty reviews (such as information technology, Bank Secrecy Act/anti-money laundering, consumer compliance and Community Reinvestment Act examinations) are often incorporated into the management component rating and can contribute to ratings downgrades even when they do not reflect material financial risks. The proposal would clarify that specialty review findings would influence CAMELS composite and component ratings only to the extent that such findings impact a financial institution's overall financial condition, represent material financial risks or reflect significant noncompliance with laws and regulations.
Revisions to Composite Rating Definitions
The proposal would revise the definitions for composite ratings 1 through 5 to align with the broader approach of ensuring that the UFIRS focuses on an institution's financial condition and risk profile, with emphasis on material financial risks. Key definitional changes include:
Composite 1 and 2
Clarify that institutions with these ratings have strong or satisfactory financial performance, respectively, and only minor or moderate risk management weaknesses.
Composite 3
Institutions receiving this rating should exhibit less than satisfactory financial performance or inadequate risk management practices that result in material financial risk to the institution, or significant noncompliance with laws and regulations.
Composite 4
Institutions receiving this rating should exhibit "deficient" financial performance—risk management weaknesses that do not result in observable deterioration of financial condition or material financial risk would not alone support a 4 or worse rating.
Composite 5
Institutions rated as composite 5 should exhibit critically deficient financial performance.
Clarifying Evaluation Factors
The current framework states that component ratings will be based on, "but not limited to," a specific set of evaluation factors. The proposal would remove the "but not limited to" language and replace it with a general paragraph allowing for additional evaluation factors to be considered only if warranted by exceptional circumstances or evolving business practices—and only if critical to the assessment of an institution's financial condition or risk profile. Examiners would be required to document and explain the rationale for inclusion of such additional factors.
Improving Consistency, Structure and Language
The proposal would introduce more consistent terminology and a streamlined structure to the component rating definitions. For financial condition, the proposal would use the terms "strong," "satisfactory," "less than satisfactory," "deficient" and "critically deficient." For descriptions of risk management practices, the proposal would use the terms "effective," "adequate," "inadequate" and "deficient." The proposal would also modernize and conform the overall framework language to improve clarity, precision and accessibility for institutions of all sizes.
Expected Effects and Implications for Financial Institutions
The proposal, if adopted, could have significant implications for supervised institutions. Under the proposed framework, financial institutions with strong financial metrics and risk profiles would likely be issued satisfactory CAMELS ratings, even if they have process-related issues that are immaterial to their financial condition. Research cited in the proposal suggests that CAMELS ratings significantly affect lending behavior and bank performance, with downgraded banks exhibiting substantially lower loan growth. To the extent that ratings downgrades owing to process-related issues have historically constrained institutions' willingness or ability to engage in expansionary activities including lending, the FFIEC expects the new framework could support increased credit availability.
The proposed changes would also provide clearer supervisory expectations, potentially reducing compliance costs and uncertainty while maintaining supervisory outcomes. Institutions devote significant time and effort to meeting the expectations of supervisors, and if those expectations and guideposts are unclear, the cost of compliance may rise.
However, the FFIEC acknowledges potential costs. Because the proposed framework would shift the focus toward factors that materially affect an institution's financial condition, there is a risk that management may deprioritize certain risk management practices if those practices are not perceived to be directly linked to material financial risk. To the extent that the proposal delayed the remediation of a risk that subsequently becomes material, institutions could incur higher costs and losses.
Stakeholder Reactions
FDIC Chairman Travis Hill characterized the proposal as "an important step in the FDIC's ongoing efforts to reform bank supervision to focus on factors that materially affect an institution's financial condition and risk profile," and noted that under the proposal, a bank's internal controls and risk management would remain relevant but the primary focus would shift to fundamental financial risks most pertinent to safety and soundness.
The FFIEC State Liaison Committee, which participated in the development of the proposed framework, expressed support for its publication. Committee Chairman Charles G. Cooper emphasized that "it is vital that this balanced approach be maintained in the final CAMELS framework," and noted that while material financial risks remain a core focus, the rating system must also factor in effective management of cyber, information technology, legal and regulatory compliance and operational risks, because material weaknesses in these disciplines can undermine safety and soundness, harm consumers and lead to distressed situations.
Comment Process and Next Steps
The FFIEC is soliciting public comment on all aspects of the proposed revisions. The FFIEC has also posed specific questions to commenters, including the extent to which the proposed revisions enhance the effectiveness of CAMELS rating system as a supervisory tool, whether the framework appropriately balances financial condition and risk profile considerations, what threshold of specialty review findings should warrant inclusion in ratings, and whether the framework should set an explicit expectation that no single component rating drives the composite rating.
Comments must be submitted by August 17, 2026. The proposed revisions would apply to all FDIC-supervised financial institutions, all national banks and federal savings associations and all federally insured credit unions.
Key Takeaways for Financial Institutions
Financial institutions should closely review the proposed revisions and consider submitting comments during the 90-day comment period.
Shifted Priorities
The proposal signals a meaningful recalibration of supervisory priorities, with potentially favorable implications for institutions that have strong financial fundamentals but have received downgrades based on process-related or documentation deficiencies.
Impact of New Focus
Institutions should assess how their current CAMELS ratings might be affected by the proposed emphasis on material financial risks and the de-emphasis of nonfinancial process concerns.
Resource Allocation
Institutions that have devoted substantial compliance resources to addressing specialty review findings or management component concerns that may not rise to the level of material financial risk should evaluate whether the proposal, if finalized, would alter their supervisory posture and resource allocation.
A Balanced Approach
At the same time, institutions should not prematurely deprioritize risk management, compliance, or operational controls, as the State Liaison Committee and other stakeholders have emphasized that material weaknesses in these areas can still undermine safety and soundness.
For More Information
If you have any questions about this Alert, please contact Joseph E. Silvia, any of the attorneys in our Corporate Practice Group, any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.