The CAMELS Rewrite, Mapped

The Uniform Financial Institutions Rating System (UFIRS) was adopted by the Federal Financial Institutions Examination Council (FFIEC) on November 13, 1979, and updated on December 20, 1996. Over the years, the UFIRS has generally proven to be an effective internal supervisory tool for evaluating the soundness of financial institutions on a uniform basis and for identifying those institutions requiring special attention or concern.

The UFIRS evaluates the safety and soundness of a financial institution through an assessment of the institution's overall financial condition and its risk profile, with emphasis on material financial risks. The UFIRS considers the institution's financial condition, measured in terms of Capital Adequacy, Asset Quality, Earnings, Liquidity, and Sensitivity to Market Risk. The UFIRS also evaluates the effectiveness of an institution's risk management relative to its risk profile, including its ability to identify, measure, monitor, and control its risks.

The revisions to UFIRS are not intended to add to the regulatory burden of institutions or require additional policies or processes. The revisions are intended to promote and complement efficient examination processes. The revisions have been made to update the rating system, while retaining the basic framework of the original rating system. The FFIEC has identified ways to further clarify the UFIRS system to strengthen the link between supervisory ratings and safety and soundness. Specifically, the revised UFIRS retains the basic framework of the existing rating system but emphasizes factors that materially affect an institution's financial condition and risk profile. These updates will improve the effectiveness of UFIRS as a supervisory tool and increase the public's confidence in supervisors' assessment of the banking system.

The UFIRS takes into consideration certain financial, managerial, and compliance safety and soundness related factors that are common to all institutions. Under this system, the supervisory agencies FFIEC member entities endeavor to ensure that all financial institutions are evaluated in a comprehensive and uniform manner, and that supervisory attention is appropriately focused on the financial institutions exhibiting financial and operational weaknesses or adverse trendsmaterial financial weaknesses or risks.

The UFIRS also serves as a useful vehicle for identifying problem or deteriorating financial institutions, as well as for categorizing institutions with deficiencies in particular component areas. Further, the rating system assists Congress in following safety and soundness trends and in assessing the aggregate strength and soundness of the financial industry. As such, the UFIRS assists the agencies FFIEC member entities in fulfilling their collective mission of maintaining stability and public confidence in the nation's financial system.

Under the UFIRS, each financial institution is assigned a composite rating that measures its overall financial condition and risk profile, with emphasis on material financial risks. The composite rating is based on an evaluation and rating of six essential components of an institution's financial condition and operations. These component factors address the adequacy of capital, the quality of assets, the capability of management, the quality and level of earnings, the adequacy of liquidity, and the sensitivity to market risk.safety and soundness. These components are Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Evaluations of the components take into consideration the institution's size and sophistication, the nature and complexity of its activities, and its risk profile.

Composite and component ratings are assigned based on a 1 to 5 numerical scale. A 1 indicates the highest rating, the strongest performance and risk management practices, and the least degree of supervisory concern, while a 5 indicates the lowest rating, the weakest performance, inadequate risk management practices and, therefore, the highest degree of supervisory concern.

The composite rating generally bears a close relationship to the component ratings assigned. However, the composite rating is not derived by computing an arithmetic average of the component ratings. Each component rating is based on a qualitative analysis of the factors rigorous assessment of the evaluation factors comprising that component and its interrelationship with the other components. In the revised framework, financial condition and material financial risks are the predominant considerations when making rating determinations. When assigning a composite rating, some components may be given more weight than others depending on the situation at the institution. In general, assignment of a composite rating may incorporate any factor that bears significantly on the overall condition and soundness of the financial institution. institution's overall financial condition and risk profile with emphasis on material financial risks. Assigned composite and component ratings are disclosed to the institution's board of directors and senior management.

Change C — specialty / foreign branch
Foreign Branch and specialty examination review findings and the ratings assigned to those areas are taken into consideration, as appropriate, are considered when assigning component and composite composite and component ratings under the UFIRS to the extent that they impact an institution's overall financial condition or pose material financial risk. The specialty examination areas include: Compliance, Community Reinvestment, Government Security Dealers, Information Systems, Municipal Security Dealers, Transfer Agent, and Trust. For institutions that primarily engage in trust activities (such as trust banks), Trust examination findings and ratings generally reflect the institution's overall financial condition or material financial risks, and examination conclusions are taken into consideration when assigning composite and component ratings under the UFIRS.

Composite ratings are based on a careful evaluation of an institution's managerial, operational, financial, and compliance performance financial condition and risk profile with emphasis on material financial risks. The six key components used to assess an institution's financial condition and operations are: capital adequacy, asset quality, management capability, earnings quantity and quality, the adequacy of liquidity, and sensitivity to market risk Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. The rating scale ranges from 1 to 5, with a rating of 1 indicating: the strongest performance and risk management practices relative to the institution's size, complexity, and risk profile; and the level of least supervisory concern. A 5 rating indicates: the most critically deficient level of performance; inadequate risk management practices relative to the institution's size, complexity, and risk profile; and the greatest supervisory concern. The composite ratings are defined as follows:

Composite 1. Financial institutions in this group are sound in every respect and generally have components rated 1 or 2. Any weaknesses are minor and can be handled in a routine manner by the board of directors and management. These financial institutions are the most capable of withstanding the vagaries of business conditions and are resistant to outside influences such as economic instability in their trade area. These institutions exhibit strong financial performance. Risk management weaknesses are minor. These financial institutions are in substantial compliance with laws and regulations. As a result, these financial institutions exhibit the strongest performance and risk management practices relative to the institution's size, complexity, and risk profile, and give institutions give no cause for supervisory concern.

Composite 2. Financial institutions in this group are fundamentally sound. For a financial institution to receive this rating, generally and generally no component rating should be more severe than 3. Only moderate weaknesses are present and are well within the board of directors' and management's capabilities and willingness to correct. These financial institutions are stable and are capable of withstanding business fluctuations. These financial institutions These institutions exhibit satisfactory financial performance. Any risk management weaknesses are moderate and generally do not result in material financial risk to the institution. These institutions are in substantial compliance with laws and regulations. Overall risk management practices are satisfactory relative to the institution's size, complexity, and risk profile. There are no material supervisory concerns There are no material safety and soundness concerns and, as a result, the supervisory response is informal and limited.

Composite 3. Financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2. Additionally, these financial institutions may be in and generally no component rating should be more severe than 4. These institutions exhibit less than satisfactory financial performance or inadequate risk management practices that result in material financial risk to the institution. There may be significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institution's size, complexity, and risk profile. These These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely, however, given the overall strength and financial capacity of these institutions.

Composite 4. Financial institutions in this group generally exhibit unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Financial institutions in this group generally are not capable of withstanding business fluctuations. There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the institution's size, complexity, and risk profile. a significant degree of supervisory concern. These institutions exhibit deficient financial performance. Any risk management weaknesses range from severe to critically deficient. There may be significant noncompliance with laws and regulations that represents material financial risk. Close supervisory attention is required, which means, in most cases, formal enforcement action is necessary to address the problems. Institutions in this group pose a risk of loss to the deposit insurance fund Deposit Insurance Fund or Share Insurance Fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved.

Composite 5. Financial institutions in this group exhibit extremely unsafe and unsound practices or conditions; exhibit a critically deficient performance; often contain inadequate risk management practices relative to the institution's size, complexity, and risk profile; and are of the greatest supervisory concern. The volume and severity of problems are beyond management's ability or willingness to control or correct. the highest degree of supervisory concern. These institutions exhibit critically deficient financial performance. Immediate outside financial or other assistance is needed in order for the financial institution to be viable. Ongoing supervisory attention is necessary. Institutions in this group pose a significant risk of loss to the deposit insurance fund Deposit Insurance Fund or Share Insurance Fund, and failure is highly probable.

Each of the component rating descriptions is divided into three sections: an introductory paragraph; a list of the principal evaluation factors that relate to that component; and a brief description of each numerical rating for that component. Some of the evaluation factors are reiterated under one or more of the other components to reinforce the interrelationship between components. Generally, component ratings are determined by the specific evaluation factors listed in the following sections; however, exceptional circumstances or evolving business practices could give rise to additional evaluation factors that are critical to an assessment of an institution's financial condition or risk profile with emphasis on material financial risks. If any factor beyond those listed is considered when assigning a supervisory rating, examiners should document and explain the factor. The listing of evaluation factors for each component rating is evaluation factors for each component rating are in no particular order of importance.

The Capital Adequacy rating reflects a financial institution's ability to maintain sufficient capital to absorb unexpected losses from credit, market, and other risk exposures. An institution A financial institution is expected to maintain capital commensurate with the nature and extent of risks to the institution and the ability of management to identify, measure, monitor, and control these risks. The effect of credit, market, and other risks on the institution's financial condition should be considered when evaluating the adequacy of capital. The types and quantity of risk inherent in in an institution's activities will determine the extent to which it may be necessary determine whether it may be appropriate to maintain capital at levels above required regulatory minimums to properly reflect the potentially adverse consequences that these risks may have on the institution's capital appropriately support on- and off-balance sheet exposures.

Evaluation factors (rated based upon, but not limited to) (Capital Adequacy is rated based on an assessment of the following):

• The level and quality of capital and the overall financial condition of the institution institution's overall financial condition.
• The ability of management to address emerging needs for additional capital. The institution's effectiveness in maintaining capital levels commensurate with its risk profile and strategic priorities through a range of economic conditions.
• The nature, trend, and volume of problem assets, and the adequacy of allowances for loan and lease losses and other valuation reserves credit losses and other asset valuation allowances.
• Balance sheet composition, including the nature and amount of intangible assets, market risk, concentration risk, and risks associated with nontraditional activities market risks, credit risks, concentration risks, and risks associated with other material activities.
• Risk exposure represented by off-balance sheet activities. Risks posed by off-balance sheet activities and contingent liabilities.
• The quality and strength of earnings, and the reasonableness of dividends capital distributions relative to the institution's financial condition and material financial risks.
• Prospects and plans for growth, as well as past experience in managing growth.
• Access to capital markets and other sources of capital, including support provided by a parent holding company. Access to other sources of capital, including capital markets and support provided by a sponsor, parent, or holding company.

Ratings. 1–2 unchanged in substance. 3: "exceeds minimum regulatory and statutory requirements." 4: In light of the institution's risk profile, viability Viability of the institution may be threatened, but failure does not appear imminent. 5: unchanged.

The asset quality Asset Quality rating reflects the quantity of existing and potential credit risks associated with a financial institution's the loan and investment portfolios, other real estate owned foreclosed or repossessed assets, and other assets, as well as off-balance sheet transactions. The ability of management to identify, measure, monitor, and control credit risk is also reflected here. The evaluation of asset quality should consider exposures. The evaluation of asset quality includes the adequacy of the allowance for loan and lease losses and weigh allowances for credit losses and the exposure to counterparty, issuer, or borrower default under actual or implied contractual agreements. All other risks that may affect the value or marketability of an institution's assets, including, but not limited to, operating, market, reputation, strategic, or compliance risks, should also be considered obligor, issuer, borrower, or other counterparty defaults.

Evaluation factors — selected diffs:

• The adequacy of underwriting standards, soundness of credit administration practices, and appropriateness of risk identification practices. The effectiveness of credit underwriting and administration practices.
• The level, distribution, severity, and trend of problem, classified adversely classified, nonaccrual, restructured, modified, delinquent, and nonperforming assets for on- both on- and off-balance sheet transactions.
• The adequacy of the allowance for loan and lease losses allowances for credit losses and other asset valuation reserves allowances.
• The financial risk arising from asset concentrations. The existence of asset concentrations.
• The ability of management to properly administer its assets, including the timely identification and collection of problem assets. → replaced by ▸ The effectiveness of risk monitoring practices and timely collection of problem assets.
• The adequacy of internal controls and management information systems.
• The volume and nature of credit documentation exceptions.

Ratings. Terminology standardized (Change G): a 3 shifts from "less than satisfactory… There is generally a need to improve credit administration and risk management practices" to the streamlined "less than satisfactory asset quality or inadequate credit underwriting or administration practices"; "management's abilities" qualifiers removed from the 1 and 2 tiers.

Change B + threshold

The capability of Management rating reflects the effectiveness of a financial institution's board of directors and management, in their respective roles, to identify, measure, monitor, and control the material financial risks associated with the institution's activities. the board of directors and management, in their respective roles, to identify, measure, monitor, and control the risks of an institution's activities and to ensure a financial institution's safe, sound, and efficient operation in compliance with applicable laws and regulations is reflected in this rating. Generally, directors need not be actively involved in day-to-day operations; however, they must provide clear guidance regarding acceptable risk exposure levels and ensure that appropriate policies, procedures, and practices have been established. Senior management is responsible for developing and implementing policies, procedures, and practices that translate the board's goals, objectives, and risk limits into prudent operating standards. Depending on the nature and scope of an institution's activities, management practices may need to address some or all of the following risks: credit, market, operating or transaction, reputation, strategic, compliance, legal, liquidity, and other risks. Sound risk management practices are demonstrated through effective board of directors and senior management oversight; risk management policies, practices, and limits; audits, internal controls, and recordkeeping; and risk monitoring and management information systems.

Evaluation factors:

• The level and quality of oversight and support of all institution activities by the board of directors and management.
• The ability effectiveness of the board of directors and management, in their respective roles, to plan for and , and respond to, risks that may arise from changing business conditions or the initiation of new activities or products.
• The adequacy of, and conformance with, appropriate internal policies and effectiveness of controls addressing the operations and risks of significant activities.
• The accuracy, timeliness, and effectiveness of management information and risk monitoring systems appropriate for the institution's size, complexity, and risk profile.
• The adequacy of audits, and internal controls, and recordkeeping to : promote effective operations and reliable financial and regulatory reporting;, safeguard assets;, and ensure compliance with laws, regulations, and internal policies and regulations.
• Compliance with laws and regulations.
• Responsiveness to recommendations from auditors and supervisory authorities.
• Management depth and succession.
• The extent that the board of directors and management is management are affected by, or susceptible to, dominant influence or concentration of authority.
• Reasonableness of compensation policies and avoidance of self-dealing. Avoidance of excessive compensation, self-dealing, and conflicts of interest.
• Demonstrated willingness to serve the legitimate banking needs of the community.
• The overall performance of the institution and its risk profile.

Ratings — rebuilt around material financial risk:

3: A rating of 3 indicates management and board performance that need improvement or risk management practices that are less than satisfactory given the nature of the institution's activities. The capabilities of management or the board of directors may be insufficient for the type, size, or condition of the institution. Problems and significant risks may be inadequately identified, measured, monitored, or controlled. A rating of 3 indicates risk management practices including internal controls, audit, or recordkeeping, that are less than satisfactory, resulting in material financial risk to the institution. This rating also applies to institutions that have unreliable financial or regulatory reporting, have failed to safeguard assets, or are in significant noncompliance with law or regulation. The capabilities of management or the board of directors may be insufficient for the type, size, or condition of the institution.

4: …risk management practices that are inadequate considering the nature of an institution's activities. The level of problems and risk exposure is excessive. Problems and significant risks are inadequately identified, measured, monitored, or controlled and require immediate action… A rating of 4 indicates deficient risk management practices, resulting in material financial risk to the institution. The level of problems and risk exposure is excessive. Immediate action is required to preserve the soundness of the institution. Replacing or strengthening management or the board may be necessary.

5: …critically deficient management and board performance or risk management practices. Management and the board of directors have not demonstrated the ability to correct problems… Problems and significant risks are inadequately identified, measured, monitored, or controlled and now threaten the continued viability… A rating of 5 indicates critically deficient risk management practices, resulting in material financial risk to the institution. Problems and significant risks now threaten the continued viability of the institution. Replacing or strengthening management or the board of directors is likely necessary.

Evaluation factors — selected diffs:

• The level of expenses in relation to operations. The level of funding costs and noninterest expenses relative to the institution's business model.
• The adequacy of the budgeting systems, forecasting processes, and management information systems in general. The effectiveness of budgeting and income and expense forecasting.
• The adequacy of provisions to maintain the allowance for loan and lease losses and other valuation allowance accounts allowances for credit losses and other asset valuation allowances.
• The earnings exposure to market risk such as interest rate, foreign exchange, commodity price, or other financial instrument price risks and price risks.

Description sentence adds explicit funding/operating-expense and "poorly executed business strategies" framing; ratings ladder relabeled per Change G ("need to be improved" → "less than satisfactory"; "need to be improved/deficient" terminology standardized).

In evaluating the adequacy of a financial institution's liquidity position, consideration should be given to the general, the Liquidity rating reflects the current level and prospective sources of liquidity compared to funding needs, as well as to the adequacy of funds management practices relative to the institution's size, complexity, and risk profile. In general, funds management practices should ensure that an institution is able to maintain a level of liquidity sufficient to meet its financial obligations in a timely manner and to fulfill the legitimate banking needs of its community. In general, funds management practices should ensure that a financial institution is able to maintain sufficient liquidity to meet its financial obligations in a timely manner. Practices should reflect the ability of the institution institution's ability to manage unplanned changes in funding sources, as well as react to changes in market conditions… Contingency funding plans should enable an institution to effectively navigate funding shortfalls or stress events and include operationalized and confirmed access to reliable funds providers.

Evaluation factors — selected diffs:

• Access to money markets and other sources of funding. Access to reliable external or contingent funding sources, particularly to address potential liquidity shortfalls.
• The level of diversification of funding sources level of funding diversification or funding concentrations, both on- and off-balance sheet.
• The degree of reliance on short-term, volatile sources of funds, including borrowings and brokered deposits, or less stable funding sources to fund longer term-term assets.
• The ability to securitize and sell certain pools of assets pledge, sell, or securitize assets.
• The capability of management to properly identify, measure, monitor, and control the institution's liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans. → ▸ The effectiveness of funds management practices, including contingency funding plans and cash flow forecasting.

Ratings. "well-developed funds management practices" → "effective funds management practices"; "present and anticipated liquidity needs" → "present, anticipated, and contingent liquidity needs"; tiers relabeled per Change G.

The sensitivity to market risk component Sensitivity to Market Risk rating reflects the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices other financial instrument prices can adversely affect a financial institution's earnings or economic capital. When evaluating this component, consideration should be given to: management's ability to identify, measure, monitor, and control market risk; the institution's size; the nature and complexity of its activities; and the adequacy of its capital and earnings in relation to its level of market risk exposure capital. When evaluating this component, the primary consideration is the level, trend, measurement, and control of market risk relative to an institution's capital and earnings.

Evaluation factors — selected diffs:

• The sensitivity of the financial institution's institution's earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices, or equity prices other financial instrument prices.
• Recent net interest income performance in response to the interest rate environment, and expectations for net interest income based on the balance sheet position and exposure to interest rate volatility.
• Measures of the long-term sensitivity of exposure to interest rate volatility on the institution's net economic value.
• The ability of management to identify, measure, monitor, and control exposure to market risk given the institution's size, complexity, and risk profile. The adequacy of market risk measurement and control practices given the institution's scale and activities.
• The degree to which assets, liabilities, and off-balance sheet exposures are appropriately aligned… as well as other risk mitigation strategies, such as hedging.
• The effectiveness of managing embedded options risk in assets and liabilities.

Ratings. Each tier loses the standalone "Risk management practices are [strong/satisfactory/…] for the size, sophistication, and market risk accepted" sentences (Change G — RM detail stripped from non-Management ladders); "well controlled / satisfactorily controlled / less than satisfactory / deficient / critically deficient" vocabulary applied.