CAMELS Ratings: Management

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This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, appears at least once each month.

Last month, we addressed the examiner's process for reviewing and rating the asset quality of banks. This month, we examine the third component of the safety and soundness ratings system for banks (called CAMELS): management. The first component that we addressed was capital adequacy, and the remaining components are earnings, liquidity and sensitivity to market risk. See Stackhouse, Julie. “The ABCs of CAMELS.” St. Louis Fed On the Economy, July 24, 2018.

The Role of Bank Leaders

Individuals in leadership roles at a bank have multiple responsibilities. Importantly, regulators expect management to operate the bank in a safe and sound manner. This includes a culture that promotes compliance with all applicable rules and regulations, including those associated with consumer protection and the Community Reinvestment Act.

Bank examiners are tasked with appraising the knowledge, character and leadership capabilities of the individuals who guide and supervise the bank. To do so, examiners ask key questions, including:

• Is the bank operating in compliance with laws and regulations?
• Does the bank perform satisfactorily in key areas, such as its capital level, asset quality, earnings, liquidity and sensitivity to market risk?
• Does management respond quickly to address shortcomings resulting from failed internal control processes, audits and examinations?
• Does management implement policies and a culture that promotes the safe and effective operation of the bank?
• Does the board of directors appropriately govern the bank’s operations, including the establishment of its strategies and the approval of budgets? Does bank management inform the board of its progress in executing strategies and performance against budget? Does the board understand the key risks facing the bank?
• Are decisions made by management consistent with the direction set by the board of directors?

Risk Management

In assessing management, Federal Reserve examiners also consider the effectiveness of a bank’s risk management processes. Sound risk management is vital for bank management to capably execute its responsibilities.

The risk management assessment considers:

• The effectiveness of oversight provided by the bank’s board of directors and senior management
• The effectiveness of policies, procedures and limits
• The strength of internal controls, risk monitoring and management information systems

Risk management systems vary in sophistication and are dependent on the size and complexity of the bank.

Summing It Up

After analyzing the competency and control of bank management, examiners assign a management rating from 1 to 5. Ratings of 1 (strong) and 2 (satisfactory) are positive ratings. Ratings of 3 (less than satisfactory), 4 (deficient) and 5 (critically deficient) result in supervisory follow up. This could include an independent study of the effectiveness of management, expectations for stronger oversight by the board of directors or, in extreme cases, removal of management from their positions.

Notes and References

¹ The first component that we addressed was capital adequacy, and the remaining components are earnings, liquidity and sensitivity to market risk. See Stackhouse, Julie. “The ABCs of CAMELS.” St. Louis Fed On the Economy, July 24, 2018.

Additional Resources

• On the Economy: Why Are Banks Regulated?
• On the Economy: Why Does the Fed Supervise Small Banks?
• On the Economy: The ABCs of CAMELS