[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'
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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
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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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