FFIEC Proposes Revisions to CAMEL

The bank regulatory agencies, working together through the Federal Financial Institutions Examination Council ("FFIEC") have proposed revisions to the Uniform Financial Institutions Rating System, often referred to as the CAMEL rating system.

The proposed changes to the rating system would place more emphasis on management and controls to anticipate, manage, control, and prevent risk. In effect, the proposed changes to the rating system would bring in many principles of risk management that are already well established in compliance management. The changes are based on the existing system, and the proposed changes would emphasize certain aspects of the bank's risk position and management.

The composite rating system is designed to reflect the institutions financial condition, and management capability as well as compliance with all applicable laws and regulations. The proposed system emphasizes management in several ways.

In the management component of the proposed system, the institution would be evaluated on the extent to which the board of directors and management are effective in identifying, measuring, monitoring, and controlling risks to the bank. Risk areas include: credit, market, transaction or operating risk, reputation, strategic, compliance, and legal risk.

Sound management practices would include active and knowledgeable oversight by the board of directors and management, adequate policies, processes and controls, and effective monitoring and information systems. The proposal stresses that these management, control, and information systems should apply to all areas of the bank.

The rating system would specifically include several techniques and procedures that are fundamental to good compliance management:

• The level and quality of oversight by the board of directors and management;
• The adequacy and use of internal policies and controls;
• The accuracy and timeliness of management information and risk monitoring systems;
• The adequacy of audits and internal controls;
• Responsiveness of management to recommendations from auditors; and
• Demonstrated willingness to serve the legitimate banking needs of the community.

This proposed rating system seems to provide official recognition to the importance of compliance management in the banks overall performance. Taken together with the compliance examination's emphasis on management processes and controls, the new rating system provides compliance managers with powerful tools to get the job done with the support of management.

Comments should be directed to Joe M. Cleaver, Executive Secretary, Federal Financial Institutions Examination Council, 2100 Pennsylvania Ave. NW, Suite 200, Washington DC 20037. You can also submit your comments by FAX to (202) 634-6556.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 13, 8/96