[Federal Register Volume 84, Number 211 (Thursday, October 31, 2019)]
[Notices]
[Pages 58383-58386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23739]


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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

[Docket No. OP-1681]
RIN 3064-ZA08


Request for Information on Application of the Uniform Financial 
Institutions Rating System

AGENCY:  Federal Deposit Insurance Corporation and Board of Governors 
of the Federal Reserve System

ACTION: Notice and request for comment.

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SUMMARY: The Board of Governors of the Federal Reserve System (FRB) and 
the Federal Deposit Insurance Corporation (FDIC) and (collectively, the 
agencies) are seeking information and comments from interested parties 
regarding the consistency of ratings assigned by the agencies under the 
Uniform Financial Institutions Rating System (UFIRS). The assigned 
ratings are commonly known as CAMELS ratings. The agencies also are 
interested in receiving feedback concerning the current use of CAMELS 
ratings by the agencies in their bank application and enforcement 
action processes.

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DATES: Comments must be received by December 30, 2019

ADDRESSES: Board: You may submit comments, identified by Docket No. OP-
1681, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551. All public comments are available from the 
Board's website at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or 
to remove personally identifiable information at the commenter's 
request. Accordingly, comments will not be edited to remove any 
identifying or contact information. Public comments may also be viewed 
electronically or in paper in Room 146, 1709 New York Avenue NW, 
Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays.

FDIC

    You may submit comments, identified by RIN 3064-ZA08, by any of the 
following methods:
     Agency Website: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the Agency 
website.
     Email: [email protected]. Include the RIN 3064-ZA08 in the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429.
     Hand Delivery: Comments may be hand-delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7:00 a.m. and 5:00 p.m.
     Public Inspection: All comments received must include the 
agency name and RIN for this rulemaking. All comments received will be 
posted without change to http://www.fdic.gov/regulations/laws/federal/
--including any personal information provided--for public inspection. 
Paper copies of public comments may be ordered from the FDIC Public 
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington, 
VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: 
    Board: Alex Kobulsky, Senior Financial Institution Policy Analyst 
II, (202) 452-2031, and Catherine Pich[eacute], Deputy Associate 
Director, (202) 452-3793, Division of Supervision and Regulation; or 
Patricia Yeh, Senior Counsel, (202) 452-3089, Legal Division, Board of 
Governors of the Federal Reserve System, 20th and C Streets NW, 
Washington, DC 20551. For the hearing impaired only, Telecommunication 
Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Rae-Ann Miller, Associate Director, Risk Management Policy; 
Samuel B. Lutz, Counsel Supervision and Legislation Branch, Legal 
Division, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

Background Information

    Section 10(d) of the Federal Deposit Insurance Act (FDI Act) 
generally requires the appropriate federal banking agency for an 
insured depository institution to conduct a full-scope, on-site 
examination at least once every 12 months, but permits a longer cycle--
at least once every 18 months--for insured depository institutions that 
meet certain criteria, including the requirement that the insured 
depository institution must have total assets below a specified size 
limit.\1\ At the conclusion of an examination, examination staff 
develop findings and conclusions, which serve as the primary basis for 
assessing the condition of an insured depository institution under the 
UFIRS.\2\ The UFIRS is commonly called the CAMELS rating system, which 
is an acronym of the six evaluation components: Capital, Asset Quality, 
Management, Earnings, Liquidity, and Sensitivity to Market Risk. In 
addition, the CAMELS rating system contains an overall composite 
rating.
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    \1\ See Section 10(b) and 10(d) of the Federal Deposit Insurance 
Act. 12 U.S.C. 1820(d). See also 83 FR 67033 (December 28, 2018).
    \2\ Additional details on the conduct and rationale of FDIC bank 
examinations can be found in the Risk Management Manual of 
Examination Policies and FRB examinations can be found in the 
Commercial Bank Examination Manual, which is available at: https://www.federalreserve.gov/publications/files/cbem.pdf.
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    The Federal Financial Institutions Examination Council (FFIEC) \3\ 
first adopted the UFIRS in 1979 to provide supervisors with a 
methodology for evaluating the soundness of depository institutions on 
a uniform basis. In addition, the UFIRS promotes uniform supervisory 
practices, and provides a consistent mechanism for identifying problem 
institutions.\4\ In December 1996, the UFIRS was revised after public 
notice and comment.\5\ The updated UFIRS added a component for rating 
sensitivity to market risk. The rating system was revised to clarify 
that the component rating assessments should consider an institution's 
size, the nature and complexity of its business activities, and its 
risk profile; increase emphasis on risk management; and address 
additional complexities associated with on- and off-balance sheet 
investments of financial institutions.
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    \3\ Federal Financial Institutions Examination Council Act of 
1978 (Pub. L. 95-630) (Nov. 10, 1978). Currently, the Director of 
the Consumer Financial Protection Bureau, the Chair of the Board of 
the FDIC, a governor of the Board of Governors of the Federal 
Reserve System, the Chairman of the National Credit Union 
Administration, the Comptroller of the Currency, and a 
representative state regulator are voting members of the FFIEC. The 
functions of the FFIEC Council include establishing principals and 
standards, making recommendations regarding supervisory matters and 
adequacy of supervisory tools, and developing a uniform reporting 
system.
    \4\ See https://www.gao.gov/assets/100/98389.pdf.
    \5\ See 61 FR 37472 (July, 18, 1996) and 61 FR 67021 (Dec. 19, 
1996). See also SR letter 96-38, ``Uniform Financial Institutions 
Rating System,'' available at: https://www.federalreserve.gov/boarddocs/srletters/1996/sr9638.htm.
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CAMELS Rating System

    The UFIRS describes each rating component, and includes a list of 
factors that examiners evaluate when assigning a rating to the 
institution. Examiners assign CAMELS components and composite ratings 
on a scale of ``1'' to ``5.'' A rating of ``1'' indicates the highest 
rating, strongest performance and risk management practices, and the 
least degree of supervisory concern, whereas a ``5'' indicates the 
lowest rating, weakest performance, inadequate risk management 
practices, and therefore, the highest degree of supervisory concern. 
Each component rating contains risk management considerations that 
emphasize the ability of management to respond to changing 
circumstances and to address the risks that may arise from changing 
business conditions or the initiation of new activities or products and 
are an important factor in evaluating a financial institution's overall 
risk profile and the level of supervisory attention warranted. 
Institutions are rated individually based on their primary Federal or 
state regulator's assessment of how each institution's risk profile 
fits the CAMELS definitions.
    The agencies also conduct reviews and examinations of institutions'

[[Page 58385]]

compliance with laws and regulations related to anti-money laundering 
and consumer protection. Examiners consider the results and findings 
from these and other types of examinations and reviews, as appropriate, 
when assigning component and composite ratings under CAMELS.
    The composite CAMELS rating bears a close relationship to the 
assigned component ratings. However, examiners do not assign a 
composite rating by computing an arithmetic average of the component 
ratings. When assigning a composite rating, examiners may give some 
components more weight than others depending on the situation and risk 
of the institution. Assignment of a composite rating may incorporate 
any factor that bears significantly on the overall condition and 
soundness of the institution.
    The agencies also conduct examinations and reviews of certain 
specialty areas, outside of the CAMELS ratings, such as information 
technology,\6\ asset management/trust,\7\ and government securities 
dealers or clearing agencies.\8\ For the aforementioned specialty 
areas, agencies assign unique ratings to institutions. These rating 
systems are excluded from this RFI.
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    \6\ 64 FR 3109 (Jan. 20, 1999).
    \7\ 63 FR 54704 (Oct. 13, 1998).
    \8\ 17 CFR 450.3.
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    In addition to the regularly scheduled examinations, the agencies 
conduct off-site institution surveillance and monitoring that rely on 
relevant financial regulatory reports (for example, the Call Report) 
and supervisory information. The purpose of this monitoring is to 
identify institutions exhibiting increased risk profiles or financial 
deterioration between examinations. The surveillance process promotes 
timely supervisory attention to these institutions and directs 
examination resources to them.

Communication and Confidentiality of CAMELS Ratings

    Agencies typically communicate the CAMELS ratings to an institution 
through a formal, written report of examination or other official 
agency correspondence. The CAMELS ratings and the report of examination 
or other official agency correspondence are property of the agencies 
and are provided to the institution's board of directors and management 
for their confidential use. The report of examination and official 
correspondence are strictly privileged and confidential under 
applicable law, and the agencies prohibit disclosure of an 
institution's CAMELS rating or report of examination in any manner 
without the primary federal regulator's permission, except in limited 
circumstances specified in the law (12 U.S.C. 1817(a) and 1831m) and in 
the agencies' regulations.\9\
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    \9\ See 12 CFR part 261. Any unauthorized disclosure of the 
report may subject the person or persons disclosing or receiving 
such information to the penalties of Section 641 of the U.S. 
Criminal Code (18 U.S.C. 641).
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Implications of CAMELS Ratings

    The CAMELS ratings have a number of supervisory implications for 
institutions. For instance, the agencies increase supervisory 
activities, which may include targeted examinations between regularly 
scheduled examinations, if an institution's CAMELS ratings are less 
than satisfactory.
    The agencies take CAMELS ratings into account when evaluating 
institutions' filings, such as merging with or acquiring another 
institution, opening new branches, or engaging in new activities.\10\ 
The agencies generally expect an institution to be in satisfactory 
condition, as reflected in its CAMELS ratings, before effecting 
expansion plans. The agencies expect an institution in less-than-
satisfactory condition, or that has a less-than-satisfactory record of 
consumer compliance or performance under the Community Reinvestment Act 
to concentrate their managerial and financial resources on remediating 
their deficiencies. An institution in less-than-satisfactory condition 
may seek approval for an expansionary proposal; however the agencies 
would consider whether any proposed expansion would compromise 
management's efforts to address the current deficiencies of the 
institution.
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    \10\ For the FRB see 12 CFR 208.3(b). See also SR letter 14-2/CA 
letter 14-1, ``Enhancing Transparency in the Federal Reserve's 
Applications Process,'' available at: https://www.federalreserve.gov/supervisionreg/srletters/sr1402.htm, and SR 
letter 13-7 CA letter 13-4, ``State Member Bank Branching 
Considerations,'' available at https://www.federalreserve.gov/supervisionreg/srletters/sr1307.htm. For the FDIC, see 12 CFR part 
303 of the FDIC Rules and Regulations--Filing Procedures and the 
FDIC Statement of Policy on Bank Merger Transactions.
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    Supervisors issue formal enforcement actions to institutions to 
address practices that the supervisors believe to be unlawful, unsafe, 
or unsound.\11\ The initial determination of whether formal action is 
required usually results from examination findings. As such, composite 
and component ratings assigned under CAMELS are significant indicators 
of the need for heightened supervisory attention including enforcement 
actions for more problematic issues.\12\ The UFIRS states that with 
respect to an institution with a ``4'' composite rating, ``close 
supervisory attention is required, which means, in most cases, formal 
enforcement action is necessary to address the problems.'' The agencies 
also utilize ratings in the implementation of certain laws and 
regulations.\13\
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    \11\ The Interagency Guidelines Establishing Standards for 
Safety and Soundness are found in 12 CFR 208 appendix D-1 for the 
FRB and in 12 CFR part 364 of the FDIC Rules and Regulations.
    \12\ Enforcement actions may be informal, such as a Memorandum 
of Understanding, or formal, such as an Order issued under Section 
8(b) of the Federal Deposit Insurance Act (FDI Act).
    \13\ See, for example, section 10(d) of the FDI Act, 12 U.S.C. 
1820(d); 12 CFR 337.12.
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Request for Comments From Interested Parties

    The agencies are issuing this RFI to seek public input regarding 
how CAMELS ratings are assigned to supervised institutions, and the 
implications of such ratings in the application and enforcement action 
processes. This effort to seek comments and information is consistent 
with the agencies' commitment to increase transparency, improve 
efficiency, support innovation, and provide opportunities for public 
feedback. This request for information is not a proposal to modify the 
CAMELS rating definitions. Such definitions were issued through the 
FFIEC.
    The agencies encourage comments from interested members of the 
public, including, but not limited to, insured depository institutions, 
other financial institutions or companies, individual depositors and 
consumers, consumer groups, trade associations, and other members of 
the financial services industry. Given confidentiality requirements\14\ 
applicable to financial institutions' CAMELS ratings and other report 
of examination findings and conclusions, the agencies realize there are 
limitations on responses regarding the consistency of how CAMELS 
ratings are assigned. The agencies, however, welcome general comments 
that do not breach these confidentiality requirements.
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    \14\ For the FRB, see 12 CFR 261 subpart C--Confidential 
Information Made Available to Supervised Financial Institutions and 
Financial Institution Supervisory Agencies, Law Enforcement 
Agencies, and Others in Certain Circumstances. For the FDIC, see 12 
CFR part 309--Disclosure of Information.
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Topics for Commenters

CAMELS Rating System
    1. To what extent does each agency assign composite and component 
ratings

[[Page 58386]]

in a manner that is consistent with the CAMELS rating system?
    2. To what extent do the agencies appropriately communicate and 
support each rating after an on-site examination or at the end of an 
examination cycle, including communicating the effect of each rating or 
finding on the composite rating?
    3. Does the agencies' use of the CAMELS rating system vary from one 
examination, or examination cycle, to the next? Please explain.
    4. Are the agencies generally consistent in their approach to 
assigning CAMELS ratings to institutions when compared to each other 
and across other supervisory agencies? What practices, if any, should 
the agencies consider implementing to enhance the consistent assignment 
of CAMELS ratings?
    5. To what extent do the agencies apply the CAMELS rating system in 
a manner that is sufficiently flexible to reflect differences between 
financial institutions such as size, business models, risks, and 
internal and external operating environments, as well as overall 
technological developments and emerging risks?
    6. To what extent does the scope of supervisory work performed 
during an examination cycle align with the components of the CAMELS 
rating system? Which areas, if any, should receive more or less 
emphasis in order to assign a CAMELS rating appropriately?
    7. What steps, if any, should the agencies take to promote the 
consistent application of the CAMELS framework in the supervisory 
process?
Implications of CAMELS Ratings
    8. To what extent does an institution's condition, as reflected in 
its CAMELS ratings, affect the agencies' actions on applications, 
particularly for new or expanded business activities? To what extent, 
if any, should the agencies modify or clarify their approach?
    9. To what extent do the CAMELS ratings impact the issuance of 
enforcement actions? To what extent does the issuance of enforcement 
actions impact CAMELS ratings? To what extent, if any, should the 
agencies modify or clarify their approach?
    10. What steps, if any, should the agencies take to promote the 
consistent use of CAMELS ratings in applications and enforcement 
matters?

    By order of the Board of Governors of the Federal Reserve 
System, October 17, 2019.
Ann E. Misback,
Secretary of the Board.
    Dated at Washington, DC on October 17, 2019.

Federal Deposit Insurance Corporation.
Annmarie Boyd,
Assistant Executive Secretary.
[FR Doc. 2019-23739 Filed 10-30-19; 8:45 am]
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