• On May 19, 2026, the Federal Financial Institutions Examination Council (“FFIEC”) released its long-anticipated proposal to revise the Uniform Financial Institutions Rating System (“UFIRS”), commonly known as the CAMELS rating system.
• The basic framework of the CAMELS rating system would remain intact, but the proposal would modify the composite rating and component rating definitions and assessment factors to tie ratings more closely to a bank’s financial condition and material financial risk and improve transparency and consistency in supervisory outcomes. Central to the proposed reform are changes that aim to narrow and refocus the Management component on key risk management issues and reduce the influence of the Management rating on the composite rating.
• This Debevoise in Depth summarizes the key changes proposed by the FFIEC and assesses select areas for further monitoring. A redline of the proposal against the current CAMELS rating system text is included in the Appendix. Comments are due on the proposal by August 17, 2026.

On May 19, 2026, the Federal Financial Institutions Examination Council (“FFIEC”) released its long-anticipated proposal to revise the Uniform Financial Institutions Rating System (“UFIRS”), commonly known as the CAMELS rating system. The rating system, which is used to assess the safety and soundness of banks, credit unions and other insured depository institutions, has not been meaningfully updated in 30 years.

The basic framework of the CAMELS rating system would remain intact, but the proposal would modify the composite rating and component rating definitions and assessment factors to tie ratings more closely to a bank’s financial condition and material financial risk and improve transparency and consistency in supervisory outcomes. Central to the proposed reform are changes that aim to narrow and refocus the Management component on key risk management issues and reduce the influence of the Management rating on the composite rating. A redline of the proposal against the current CAMELS rating system text is included in the Appendix.

The proposal aligns with other recent efforts by the federal banking regulators to refocus bank supervision on material financial risk and away from process-oriented concerns, including revisions to the rating system for large financial institutions (“LFI”) adopted by the Federal Reserve Board (“FRB”) in November 2025. Because revising CAMELS requires cooperation across the FFIEC’s federal and state agency membership, its reform may have more permanence than other unilateral or interagency actions taken by the federal banking regulators, although each agency will still need to implement the changes in their supervisory programs once the proposal is finalized.

Following a brief summary of the CAMELS rating system and its significance, this analysis summarizes the key changes proposed by the FFIEC and assesses select areas for further monitoring. Comments on the proposal are due August 17, 2026.

The CAMELS Rating System and Consequences of Poor Ratings

Under the CAMELS rating system, each institution receives a composite rating and six component ratings—Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk—on a 1-to-5 scale, with 1 being the highest rating, and anything lower than a 2 being considered less than satisfactory.

Ratings below 2 can have important consequences for a bank. For example, a bank must have a rating of at least 2 for both its composite rating and its Management rating to be considered “well managed,” which is required for a parent financial holding company (“FHC”) to be able to exercise its full powers to engage in financial activities and acquire financial companies. Revising the CAMELS rating system is therefore a necessary complement to the FRB’s revisions to the LFI rating system to meaningfully recalibrate supervisory ratings and reduce their impact on the permitted activities of large FHCs. Less-than-satisfactory ratings can also result in significant supervisory obstacles to pursuing acquisitions, disqualification from expedited application processing procedures, restrictions on establishing de novo interstate branches and on controlling financial subsidiaries, higher assessment rates and other restrictions.

Key Proposed Changes

Management Component Rating

• Establishes a “material financial risk threshold” for assigning Management component ratings of 3 or worse. A bank’s risk management practices generally would need to pose a material financial risk to the institution to receive a 3 Management component rating or worse, although a bank that has unreliable financial or regulatory reporting, fails to safeguard assets or is in significant noncompliance with law or regulations also could receive a 3 rating.

• Limits the scope of factors an examiner may consider under the Management component to the “most material aspects of risk management” by removing the evaluation factors for “Management depth and succession,” “Responsiveness to recommendations from auditors and supervisory authorities” and “Demonstrated willingness to serve the legitimate banking needs of the community.”

• Limits the consideration of “specialty review areas” (e.g., Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”), Consumer Compliance, Information Systems) in assigning a bank’s CAMELS composite and component ratings. Under the proposal, only those findings that “impact a financial institution’s overall financial condition, represent material financial risks, or reflect significant noncompliance with laws and regulations” would be considered in assigning CAMELS ratings.

Composite Rating

• Removes the direction to give “special consideration” to the Management component in determining the composite rating, so that a composite rating “better reflects a financial institution’s overall financial condition and risk profile.”

• The proposal describes supervisory data from 2000 to 2025 that suggest “the Management component has been the most influential factor in determining composite ratings, particularly in recent years.”

• Ties the composite rating definitions to financial performance and risk management practices that result in material financial risk by revising the definitions for composite ratings of 3 or lower.

• Under the proposal, a 3 composite rating should only be given if the bank exhibits “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.” A 4 composite rating would require “deficient” financial performance, and a 5 composite rating would require “critically deficient” financial performance.

• The proposal’s new thresholds are intended to ensure that ratings of 3 or worse are “fully supported by evidence of weaknesses that materially impact the safety and soundness of the institution.”

• By contrast, under the current definition, examiners have discretion to assign a 3 composite rating for reasons unrelated to financial performance or material financial risk. For example, a bank with a 3 composite rating may have risk management practices that are “less than satisfactory relative to the institution’s size, complexity, and risk profile” or management who “lack the ability or willingness to effectively address weaknesses within appropriate time frames.”

Clarifying Evaluation Factors and Modernizing and Standardizing Definitions

• Replaces broad, overlapping language across the non-Management components that requires examiners to evaluate management’s ability to “identify, measure, monitor and control” risks with narrower, component-specific evaluation factors focused on the “effectiveness” of the bank’s practices related to, for example, capital management or credit underwriting. This appears intended to constrain examiner discretion and reduce the risk of “double counting” management-related issues in other components by providing a more objective, results-oriented view of risk management relevant to each component.

• Narrows the ability of examiners to rely on non-enumerated evaluation factors by permitting additional considerations only in “exceptional circumstances or evolving business practices,” and only where those factors are critical to assessing an institution’s financial condition or risk profile. Examiners would be required to document and explain the rationale for including any additional factors.

• Updates the evaluation factors and modernizes terminology for specific components, such as adding express references to contingency funding planning in the Liquidity component and adding factors related to net interest income risk and interest rate volatility in Sensitivity to Market Risk.

• Introduces more standardized terminology across component ratings, including “strong,” “satisfactory,” “less than satisfactory,” “deficient” and “critically deficient” for financial condition, and “effective,” “adequate,” “inadequate” and “deficient” for risk management.

Areas to Watch

Potential for Additional Reforms

The proposal includes several specific questions suggesting the agencies are considering whether to adopt further reforms—for example, by establishing an explicit expectation that a Management rating of less than satisfactory should be “rare” when all other components are satisfactory, or by requiring additional justification when a single component rating drives the composite rating.

Notably, OCC Comptroller Jonathan Gould has already signaled his view that the proposal does not go far enough, stating that “[a]bsent extenuating circumstances, no single component rating should disproportionately drive the composite rating” and that he remains concerned “that the revisions do not sufficiently address ‘double counting’ within the Management, or M, component.”

Implications for Specialty Review Areas: Consumer Compliance and BSA/AML

Historically, Consumer Compliance, BSA/AML and Information Systems examinations have been a major supervisory priority and have often influenced Management downgrades for banks that are otherwise in a sound financial condition. The proposal’s approach to specialty review areas has the potential to significantly reduce the consequences of compliance findings in these examinations for overall CAMELS composite and Management ratings, and it will be important to watch how examination practices evolve as a result.

For BSA/AML, the proposed change is consistent with the reforms in the Financial Crimes Enforcement Network’s proposed AML program rule, which would provide that a bank with a properly established AML program should not be subject to an enforcement action or significant supervisory action, except for a “significant or systemic failure to implement” the program “in all material respects.”

No Definition of “Material Financial Risk”

The requirement to base composite and Management downgrades on a finding of “material financial risk” is likely to add discipline and rigor to the ratings, but notably absent from the proposal is a definition for “material financial risk.”

Similar issues are raised in the OCC and FDIC’s October 30, 2025 joint proposal to define unsafe and unsound practices, which introduces the concepts of “material harm” to the financial condition of the institution and “material risk of loss” to the Deposit Insurance Fund, and explicitly asks whether the agencies should define “materially” or tie it to specific quantitative measurements, indicators or thresholds, and in the FRB’s updated Statement of Supervisory Operating Principles, which states that the FRB is “in the process of developing various quantitative tests to determine whether a realized or unrealized loss would constitute significant harm to the financial condition” of a bank.

Implications for Foreign Banking Organization Ratings

The rationales driving the proposed reforms to CAMELS should equally justify reform of both the interagency ROCA ratings system applicable to the U.S. branches of foreign banks and the FRB’s composite combined U.S. operations rating for the U.S. operations of foreign banks. Foreign banking organizations may wish to consider advocating for parallel changes to these foreign bank-specific ratings systems, which are not addressed or discussed in the proposal.

Conclusion

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.