What is the history of the CAMELS rating? It dates back to 1979, when regulators adopted the Uniform Financial Institutions Rating System. The rating system became known as CAMEL, an acronym for the five components it evaluates: capital adequacy, asset quality, management and administration, earnings, and liquidity. In 1995 the Federal Reserve and the OCC replaced CAMEL with CAMELS, adding the "S" which stands for “Sensitivity to Market Risk.”Just after being confirmed to the Federal Reserve’s top regulatory post, Vice Chair for Supervision Michelle Bowman in June laid out her plans for a sweeping bank regulation overhaul.“Our goal should be to prioritize the identification of material financial risks and encourage prompt action to mitigate risks that threaten safety and soundness,” Bowman said in a speech at Georgetown University.Among her proposed changes are revamping certain regulations for community financial institutions (CFIs) to make them more suited to a smaller asset size. Here are some of the highlights of her proposal, along with the possible impact of those changes on CFIs.
1. A Possible Separate Framework for CFIsBowman suggested the Fed could adopt an independent supervisory and regulatory framework for smaller institutions to insulate CFIs from standards designed for larger and more complex firms.“Risks are not uniform, and each bank is unique based on its business model, complexity, and business profile. I am a long-time proponent of tailoring banking regulations,” she said.Such a move could meaningfully reduce the compliance burden on CFIs, allowing them to focus operational and financial resources on local markets and customer relationships. By tailoring expectations, CFIs would have greater flexibility in serving community needs. However, implementing a distinct framework will require careful coordination among regulators and may introduce transitional uncertainties as the industry adjusts to new supervisory boundaries.2. Raising the CFI Asset ThresholdArguing that the current $10B-asset threshold is too low for the additional stricter rules based on asset size and includes banks with smaller asset sizes, Bowman supports raising the threshold and potentially indexing it to inflation or growth. Increasing this threshold would release many mid-sized CFIs from compliance requirements meant for much larger institutions, promoting operational efficiency and reducing regulatory costs. Over time, inflation indexing could prevent regulatory creep that brings more institutions under stricter oversight. Still, adjusting these thresholds further could shift competition among institutions and create short-term uncertainties as classifications change and banks adapt to the new environment.3. Changing Ratings for CFIsThe Fed will revisit the appropriateness of applying the broader CAMELS ratings to CFIs, Bowman said. Bowman has questioned whether the broad application of the CAMELS rating framework is sufficiently tailored for community banks, especially where examiner judgment can be highly subjective. Rethinking the use of CAMELS for CFIs could lead to supervisory assessments that more accurately reflect actual risk and financial condition rather than process issues, which in turn could reduce unwarranted supervisory actions. Adapting the ratings, however, would require additional examiner training and initial adjustments by CFIs to ensure consistent and fair application across diverse banking models.4. Possibly Eliminating Horizontal ReviewsThe practice of horizontal reviews — examiner deep-dives on selected topics across multiple banks — has been criticized by Bowman for encouraging one-size-fits-all solutions and diminishing the relevance of simpler, effective approaches common in CFIs. Limiting or eliminating horizontal reviews could ensure that regulatory expectations are aligned more closely with individual bank circumstances and strategic choices. This would reduce pressure on CFIs to adopt unnecessarily complex (and costly) measures. On the other hand, horizontal reviews provide valuable comparative insights and help identify systemic issues, so reducing their use may risk missing broader industry trends.5. Amending CFIs’ Capital FrameworkTo ensure CFIs can continue to “provide critical support to their local communities and the economy,” the Fed could revisit the community bank framework, including how it calibrates the community bank leverage ratio. Adjustments to the capital framework could free up resources for local lending and innovation, supporting economic growth in the communities served by CFIs. At the same time, the industry and the public will expect that capital requirements retain enough rigor to protect the safety and soundness of the banking sector. Any changes must strike a careful balance between flexibility and resilience.Later this year, Bowman plans on hosting a conference on community bank issues to get feedback from them about her ideas for reform. “We must demonstrate wisdom and courage by carefully listening to those who are subject to regulatory oversight and considering ways to enhance our approaches to both supervision and regulation,” she said.
1. A Possible Separate Framework for CFIsBowman suggested the Fed could adopt an independent supervisory and regulatory framework for smaller institutions to insulate CFIs from standards designed for larger and more complex firms.“Risks are not uniform, and each bank is unique based on its business model, complexity, and business profile. I am a long-time proponent of tailoring banking regulations,” she said.Such a move could meaningfully reduce the compliance burden on CFIs, allowing them to focus operational and financial resources on local markets and customer relationships. By tailoring expectations, CFIs would have greater flexibility in serving community needs. However, implementing a distinct framework will require careful coordination among regulators and may introduce transitional uncertainties as the industry adjusts to new supervisory boundaries.2. Raising the CFI Asset ThresholdArguing that the current $10B-asset threshold is too low for the additional stricter rules based on asset size and includes banks with smaller asset sizes, Bowman supports raising the threshold and potentially indexing it to inflation or growth. Increasing this threshold would release many mid-sized CFIs from compliance requirements meant for much larger institutions, promoting operational efficiency and reducing regulatory costs. Over time, inflation indexing could prevent regulatory creep that brings more institutions under stricter oversight. Still, adjusting these thresholds further could shift competition among institutions and create short-term uncertainties as classifications change and banks adapt to the new environment.3. Changing Ratings for CFIsThe Fed will revisit the appropriateness of applying the broader CAMELS ratings to CFIs, Bowman said. Bowman has questioned whether the broad application of the CAMELS rating framework is sufficiently tailored for community banks, especially where examiner judgment can be highly subjective. Rethinking the use of CAMELS for CFIs could lead to supervisory assessments that more accurately reflect actual risk and financial condition rather than process issues, which in turn could reduce unwarranted supervisory actions. Adapting the ratings, however, would require additional examiner training and initial adjustments by CFIs to ensure consistent and fair application across diverse banking models.4. Possibly Eliminating Horizontal ReviewsThe practice of horizontal reviews — examiner deep-dives on selected topics across multiple banks — has been criticized by Bowman for encouraging one-size-fits-all solutions and diminishing the relevance of simpler, effective approaches common in CFIs. Limiting or eliminating horizontal reviews could ensure that regulatory expectations are aligned more closely with individual bank circumstances and strategic choices. This would reduce pressure on CFIs to adopt unnecessarily complex (and costly) measures. On the other hand, horizontal reviews provide valuable comparative insights and help identify systemic issues, so reducing their use may risk missing broader industry trends.5. Amending CFIs’ Capital FrameworkTo ensure CFIs can continue to “provide critical support to their local communities and the economy,” the Fed could revisit the community bank framework, including how it calibrates the community bank leverage ratio. Adjustments to the capital framework could free up resources for local lending and innovation, supporting economic growth in the communities served by CFIs. At the same time, the industry and the public will expect that capital requirements retain enough rigor to protect the safety and soundness of the banking sector. Any changes must strike a careful balance between flexibility and resilience.Later this year, Bowman plans on hosting a conference on community bank issues to get feedback from them about her ideas for reform. “We must demonstrate wisdom and courage by carefully listening to those who are subject to regulatory oversight and considering ways to enhance our approaches to both supervision and regulation,” she said.
Collectively, these proposals aim to reduce unnecessary regulatory burdens, encourage tailored supervision, and empower CFIs to meet the needs of their communities more effectively. However, any regulatory change introduces uncertainty and risk. Smaller banks may face transitional challenges as new frameworks are developed and implemented, potentially requiring adjustments in compliance processes or systems. Community bankers should remain proactive in monitoring developments and engaging with regulators to help shape the evolving landscape. By doing so, CFIs can best position themselves to respond to new regulations and continue providing critical support to local economies.
