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Last update: September 6, 2013
Since 1979, banks have been rated using the interagency Uniform Financial Institutions Ratings System (UFIRS), recommended by the Federal Reserve and other banking agencies. This rating system, referred to industry-wide by the acronym CAMELS, evaluates six components.
When assigning a composite rating, some components may be given more weight than others depending on the situation at the bank. Composite ratings may include factors that bear significantly on overall condition and soundness.
The Federal Reserve and other banking agencies use a rating system of 1-5 to evaluate the following areas:
Composite Ratings of 3, 4, or 5 may subject the bank to enforcement actions, enhanced monitoring, and limitations on expansion.
Banks with a composite 1 rating generally have components rated 1 or 2. They exhibit the strongest performance and risk-management practices relative to their size, complexity, and risk profile, and give no cause for supervisory concern. Banks with a composite 2 rating have no material supervisory concerns, and generally none of their component ratings should be more severe than 3. Banks with a composite 3 rating have a combination of moderate to severe weaknesses but generally will not cause any component to be rated more severely than 4. Banks with a composite 4 rating may fail if the problems and weaknesses are not satisfactorily addressed and resolved. Banks with a composite 5 rating have deficient performance and inadequate risk-management practices relative to the institution’s size, complexity, and risk profile. They are of the greatest supervisory concern.
|Composite 1 rating||Banks are sound in every respect. The financial institutions in this category are the most capable of withstanding fluctuating business conditions and are resistant to outside influences, such as economic instability in their trade areas.|
|Composite 2 rating||Banks are fundamentally sound and stable and can withstand business fluctuations and are in substantial compliance with laws and regulations.|
|Composite 3 rating||Banks exhibit some degree of supervisory concern in one or more of the component areas and require more than normal supervision, which may include enforcement actions. 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.|
|Composite 4 rating||Banks generally exhibit unsafe and unsound practices or conditions. They have serious financial or managerial deficiencies that result in unsatisfactory performance. The institution’s 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.|
|Composite 5 rating||Banks exhibit extremely unsafe and unsound practices or conditions. Their performance is critically deficient and risk management practices are inadequate relative to the institution’s size, complexity, and risk profile. These institutions are of the greatest supervisory concern. The volume and severity of problems are beyond management’s ability or willingness to control or correct. Institutions in this group pose a significant risk to the deposit insurance fund. Bank failure is highly probable.|
|1||Strong capital level relative to the institution’s risk profile.|
|2||Satisfactory capital level relative to the institution’s risk profile.|
|3||Less than satisfactory level of capital that does not fully support the institution’s risk profile. The rating indicates a need for improvement, even if the institution’s capital level exceeds minimum regulatory and statutory requirements.|
|4||Deficient level of capital. In light of the institution’s risk profile, viability of the institution may be threatened. Assistance from shareholders or other external sources of financial support may be required.|
|5||Critically deficient level of capital. The institution’s viability is threatened, and immediate assistance from shareholders and other external sources of financial support is required.|
|1||Strong asset-quality and credit-administration practices. Identified weaknesses are minor and risk exposure is modest in relation to capital protection and management’s abilities. Asset quality is of minimal supervisory concern.|
|2||Satisfactory asset-quality and credit-administration practices. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensurate with capital protection and management’s abilities.|
|3||Asset-quality or credit-administration practices are less than satisfactory. Trends may be stable or indicate deterioration in asset quality or an increase in risk exposure. The level and severity of classified assets, other weaknesses, and risks require an elevated level of supervisory concern. There is generally a need to improve credit administration and risk-management practices.|
|4||Deficient asset-quality or credit-administration practices. The levels of risk and problem assets are significant and inadequately controlled, and they subject the bank to potential losses that, if left unchecked, may threaten its viability.|
|5||Critically deficient asset-quality or credit-administration practices that present an imminent threat to the institution’s viability.|
|1||Strong performance by management and the board of directors and strong risk-management practices relative to the size, complexity, and risk profile. All significant risks are consistently and effectively identified, measured, monitored, and controlled. Management and the board have demonstrated the ability to promptly and successfully address existing and potential problems and risks.|
|2||Satisfactory management and board performance and risk-management practices relative to size, complexity, and risk profile. Minor weaknesses may exist, but they are not material to safety and soundness and are being addressed. In general, significant risks and problems are effectively identified, measured, monitored, and controlled.|
|3||Management and board performance that needs improvement or risk-management practices that are less than satisfactory given the nature of the institution’s activities. The capabilities of management or the board of directors may be insufficient for the type, size, or condition of the institution. Problems and significant risks may be inadequately identified, measured, monitored, or controlled.|
|4||Deficient management and board performance or risk-management practices that are inadequate considering the nature of an institution’s activities. The level of problems and risk exposure is excessive. Problems and significant risks are inadequately identified, measured, monitored, or controlled and require immediate action by the board and management to preserve the soundness of the institution. Replacing or strengthening management or the board may be necessary.|
|5||Critically deficient management and board performance or risk management practices. Management and the board of directors have not demonstrated the ability to correct problems and implement appropriate risk-management practices. Problems and significant risks are inadequately identified, measured, monitored, or controlled and now threaten the continued viability of the institution. Replacing or strengthening management or the board of directors is necessary.|
|1||Earnings are strong and more than sufficient to support operations and maintain adequate capital and allowance levels after consideration is given to asset quality, growth, and other factors affecting the quality, quantity, and trend of earnings.|
|2||Earnings are satisfactory. Earnings are sufficient to support operations and maintain adequate capital and allowance levels. Earnings that are relatively static, or even experiencing a slight decline, may receive a 2 rating provided the institution’s level of earnings is adequate in view of the assessment factors listed above.|
|3||Earnings need to be improved. Earnings may not fully support operations and provide for the accretion of capital and allowance levels in relation to the institution’s overall condition, growth, and other factors affecting the quality, quantity, and trend of earnings.|
|4||Earnings are deficient. Earnings are insufficient to support operations and maintain appropriate capital and allowance levels. These institutions may be characterized by erratic fluctuations in net income or net interest margin, the development of significant negative trends, nominal or unsustainable earnings, intermittent losses, or a substantive drop in earnings from the previous years.|
|5||Earnings are critically deficient. A financial institution with earnings rated 5 is experiencing losses that represent a distinct threat to its viability through the erosion of capital.|
|1||Strong liquidity levels and well-developed funds-management practices. The bank has reliable access to sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs.|
|2||Satisfactory liquidity levels and funds-management practices. The bank has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs. Modest weaknesses may be evident in funds-management practices.|
|3||Liquidity levels or funds-management practices in need of improvement. Banks rated 3 may lack ready access to funds on reasonable terms or may show significant weaknesses in funds-management practices.|
|4||Deficient liquidity levels or inadequate funds-management practices. Bank may not have or be able to obtain a sufficient volume of funds on reasonable terms to meet liquidity needs.|
|5||Liquidity levels or funds-management practices so critically deficient that the continued viability of the institution is threatened. Institutions rated 5 require immediate external financial assistance to meet maturing obligations or other liquidity needs.|
|1||Market-risk sensitivity is well controlled and there is minimal potential that the earnings performance or capital position will be adversely affected. Risk-management practices are strong for the size, sophistication, and market risk accepted by the institution. The level of earnings and capital provide substantial support for the degree of market risk taken by the institution.|
|2||Market-risk sensitivity is adequately controlled and there is only moderate potential that the earnings performance or capital position will be adversely affected. Risk-management practices are satisfactory for the size, sophistication, and market risk accepted by the institution. The level of earnings and capital provide adequate support for the degree of market risk taken by the bank.|
|3||Control of market-risk sensitivity needs improvement or there is significant potential that the earnings performance or capital position will be adversely affected. Risk-management practices need to be improved given the size, sophistication, and level of market risk accepted by the institution. The level of earnings and capital may not adequately support the degree of market risk taken by the institution.|
|4||Control of market-risk sensitivity is unacceptable or there is high potential that the earnings performance or capital position will be adversely affected. Risk management practices are deficient for the size, sophistication, and level of market risk accepted by the bank. The level of earnings and capital provide inadequate support for the degree of market risk taken by the institution.|
|5||Control of market-risk sensitivity is unacceptable or the level of market risk taken by the institution is an imminent threat to its viability. Risk-management practices are wholly inadequate for the size, sophistication, and level of market risk accepted by the bank.|
The rating system provides a general framework for evaluating and integrating significant compliance factors in order to assign a consumer compliance rating to each federally regulated commercial bank, savings and loan association, mutual savings bank, and credit union. The rating system does not consider or take into account an institution’s record of lending performance under the CRA or its compliance with the applicable provisions of the implementing regulations, since institutions are rated separately for CRA purposes.
The purpose of the rating system is to reflect in a comprehensive and uniform fashion the nature and extent of an institution’s compliance with consumer protection and civil rights statutes and regulations. In addition to serving as a useful tool for summarizing the compliance position of individual institutions, the rating system will also assist the public and Congress in assessing the aggregate compliance posture of regulated financial institutions.
Under the uniform rating system, each financial institution is assigned a consumer compliance rating predicated upon an evaluation of the nature and extent of its present compliance with consumer protection and civil rights statutes and regulations and the adequacy of its operating systems designed to ensure compliance on a continuing basis. The rating system is based upon a scale of 1 through 5 in increasing order of supervisory concern. Thus, “1” represents the highest rating and consequently the lowest level of supervisory concern, while “5” represents the lowest, most critically deficient level of performance and therefore the highest degree of supervisory concern. Each of the five ratings is described in greater detail below.
In assigning a consumer compliance rating, regulating agencies must evaluate and weigh all relevant factors. In general, these factors include the nature and extent of present compliance with consumer protection and civil rights statutes and regulations, the commitment of management to compliance and its ability and willingness to take the necessary steps to ensure compliance, and the adequacy of operating systems, including internal procedures, controls, and audit activities designed to ensure compliance on a routine and consistent basis. The assignment of a compliance rating may incorporate other factors that significantly affect the overall effectiveness of an institution’s compliance efforts.
While each type of financial institution has differences in its general business powers and constraints, all are subject to the same consumer protection and civil rights statutes and regulations covered by the rating system. Thus, there is no need to evaluate differing types of financial institutions on criteria related to their particular industry. As a result, the assignment of a uniform consumer compliance rating will help direct uniform and consistent supervisory attention that does not depend solely on the nature of the institution’s charter or business or the identity of its primary federal regulator. In this manner, overall uniformity and consistency of supervision will be strengthened by the existence of common consumer compliance ratings.
The primary purpose of the uniform rating system is to help identify those institutions whose compliance with consumer protection and civil rights statutes and regulations displays weaknesses requiring special supervisory attention and which are cause for more than a normal degree of supervisory concern. To accomplish this objective, the rating system identifies an initial category of institutions that have compliance deficiencies that warrant more than normal supervisory concern. These institutions are not deemed to present a significant risk of financial or other harm to consumers but do require a higher than normal level of supervisory attention. Institutions in this category are generally rated “3.” The rating system also identifies certain institutions whose weaknesses are so severe as to represent, in essence, a substantial or general disregard for the law. These institutions are, depending on nature and degree of their weaknesses, rated “4” or “5.”
The uniform identification of institutions giving cause for more than a normal degree of supervisory concern will help ensure that:
Consumer Compliance Ratings are defined and distinguished as follows:
An institution in this category is in a strong compliance position. Management is capable of and staff is sufficient for effecting compliance. An effective compliance program, including an efficient system of internal procedures and controls, has been established. Changes in consumer statutes and regulations are promptly reflected in the institution’s policies, procedures, and compliance training. The institution provides adequate training for its employees. If any violations are noted, they relate to relatively minor deficiencies in forms or practices that are easily corrected. There is no evidence of discriminatory acts or practices, reimbursable violations, or practices resulting in repeat violations. Violations and deficiencies are promptly corrected by management. As a result, the institution gives no cause for supervisory concern.
An institution in this category is in a generally strong compliance position. Management is capable of administering an effective compliance program. Although a system of internal operating procedures and controls has been established to ensure compliance, violations have nonetheless occurred. These violations, however, involve technical aspects of the law or result from oversight on the part of operating personnel. Modification in the bank’s compliance program and/or the establishment of additional review/audit procedures may eliminate many of the violations. Compliance training is satisfactory. There is no evidence of discriminatory acts or practices, reimbursable violations, or practices resulting in repeat violations.
Generally, an institution in this category is in a less than satisfactory compliance position. It is a cause for supervisory concern and requires more than normal supervision to remedy deficiencies. Violations may be numerous. In addition, previously identified practices resulting in violations may remain uncorrected. Overcharges, if present, involve a few consumers and are minimal in amount. There is no evidence of discriminatory acts or practices. Although management may have the ability to effect compliance, increased efforts are necessary. The numerous violations discovered are an indication that management has not devoted sufficient time and attention to consumer compliance. Operating procedures and controls have not proven effective and require strengthening. This may be accomplished by, among other things, designating a compliance officer and developing and implementing a comprehensive and effective compliance program. If an institution with marginal compliance is identified early, additional supervisory measures may be employed to eliminate violations and prevent further deterioration in the institution’s less-than-satisfactory compliance position.
An institution in this category requires close supervisory attention and monitoring to promptly correct the serious compliance problems disclosed. Numerous violations are present. Overcharges, if any, affect a significant number of consumers and involve a substantial amount of money. Often practices resulting in violations and cited at previous examinations remain uncorrected. Discriminatory acts or practices may be in evidence. Clearly, management has not exerted sufficient effort to ensure compliance. Its attitude may indicate a lack of interest in administering an effective compliance program, which may have contributed to the seriousness of the institution’s compliance problems. Internal procedures and controls have not proven effective and are seriously deficient. Prompt action on the part of the supervisory agency may enable the institution to correct its deficiencies and improve its compliance position.
An institution in this category is in need of the strongest supervisory attention and monitoring. It is substantially in noncompliance with consumer statutes and regulations. Management has demonstrated its unwillingness or inability to operate within the scope of consumer statutes and regulations. Previous efforts on the part of the regulatory authority to obtain voluntary compliance have been unproductive. Discrimination, substantial overcharges, or practices resulting in serious repeat violations are present.