How US Bank Examination is Changing

In a report published by American Banker, journalist Kyle Campbell explores the ongoing overhaul of US bank examination practices and the debate it has provoked across the banking and policy community.

At the center of the reform is the management component of the CAMELS rating system. Under the proposal put forward by the Federal Financial Institutions Examination Council (FFIEC), examiners would no longer give that component special weight when assigning a bank’s overall score, and downgrades on management grounds would generally require a demonstrable link to the institution’s financial condition. 

Federal Reserve Vice Chair for Supervision Michelle Bowman, who chairs the FFIEC, told Congress the changes would ensure ratings “reflect a bank’s overall safety and soundness rather than isolated or process-driven deficiencies.” The banking industry has long sought such a change, viewing the management rating as a vehicle for supervisory concerns that lack grounding in financial risk.

Critics see it differently. Cliff Rossi, a University of Maryland professor and former Chief Risk Officer in Citigroup’s consumer lending group, told American Banker that the changes “could undercut all the advances in risk management, organizational stature and effectiveness that have been in place since the ’08 crisis.” Phillip Basil of Better Markets argued that a rigid standard for material financial risk would ultimately require regulators to spell out acceptable risk levels across the industry. “It becomes the government telling banks how to manage their risks,” he said, “which has never been the role of supervision.”

Others have argued that examiners often lack the experience needed to assess management efficacy. “There’s this idea that supervision of management is too composed of ‘Did you dot your i’s and cross your t’s when you looked at this thing in your risk management process? If not, we’re going to sanction you,’” said David Zaring, Professor of Legal Studies and Business Ethics at the University of Pennsylvania’s Wharton School.

Understanding the true diagnostic value of these management ratings is a challenge, Campbell explains. Because regulators only unseal CAMELS scores after an institution has already collapsed, outsiders cannot see how often examiner discretion successfully intercepts hidden risks. 

The track record from recent failures offers ammunition to both camps, he adds. Signature Bank held a satisfactory management rating for years before its 2023 collapse, Campbell writes, even though the FDIC’s post-mortem identified management failures as the central cause. Silicon Valley Bank, by contrast, saw its management score downgraded the year before it failed, he recounts. And the Wells Fargo cross-selling scandal raises a pointed question for the new framework, Campbell notes, as the misconduct emerged at a time when the bank’s financial position gave no cause for alarm.