US Senators Push Back Against CAMELS Reforms

In a letter sent last week, US Senators John Hickenlooper and Elizabeth Warren urge the Federal Financial Institutions Examination Council (FFIEC) to revise proposed changes to the Uniform Financial Institutions Rating System, commonly known as the CAMELS rating system.

The Senators argue that the FFIEC should preserve “forward-looking” supervision that allows regulators to identify and address emerging risks before they become material financial threats. They warn that the proposal could “hamstring bank supervisors and invite more bank failures,” ultimately reducing access to credit for households and small businesses. 

“The failure of SVB illustrates the need for the CAMELS rating system to require rigorous evaluation of the capabilities and performance of bank management and forward-looking bank supervision that demands proactive remediation of risks that could develop into material financial risks,” the letter reads. Hickenlooper and Warren attribute Silicon Valley Bank’s collapse in part to longstanding governance and risk-management failures, including deficiencies in interest-rate risk management and board oversight. They argue that supervisors cannot anticipate every potential threat and must therefore assess whether bank management can identify, escalate, and mitigate emerging risks.

The letter also challenges the proposal’s emphasis on objective and measurable factors in supervisory ratings. The senators argue that qualitative considerations, including governance, culture, and risk management, are also important indicators of emerging risk. They note that the banks that failed in both 2008 and 2023 were considered “well-capitalized” shortly before failing, contending that balance-sheet measures alone may not identify developing problems.