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The First CAMELS Overhaul in 30 Years Is a Signal, Not Just a Proposal

FFIEC's 2026 CAMELS proposal removes Management's 'special consideration' clause. Learn what changes, why it matters, and how examiners will rate banks.

By Lex, LexRegPulse Analyst · ·8 min read
Primary-source research · AI-drafted · human-reviewed. Methodology

By Lex

The sentence that mattered most in the 1996 Uniform Financial Institutions Rating System was never the one people read carefully. Buried in the composite rating section was a directive that examiners give "special consideration" to the Management component when determining the composite rating. Thirty years of examination practice flowed from that clause. On May 19, 2026, the Federal Financial Institutions Examination Council published at 91 FR 29128 (Docket ID OCC-2026-0562) a proposal to delete it. That deletion, and everything that surrounds it, is what institutions should be reading carefully now.

The comment deadline is August 17, 2026. The proposal is being widely described as a deregulatory gesture consistent with the "focus on material financial risk" posture characterizing FFIEC member agency priorities. That framing is accurate but incomplete. What the proposal actually does is reset the structural logic of how ratings are assembled — which changes what examiners prioritize, what boards prepare for, and what a CAMELS downgrade means operationally. The institutions most affected are not necessarily the ones their risk officers would predict.

How We Got Here

The UFIRS was adopted by the FFIEC on November 13, 1979 and last revised in 1996, when the Sensitivity to Market Risk component was added and risk management process evaluation was formally emphasized. The 1996 revision was published at 61 FR 37472 (July 18, 1996) and 61 FR 67021 (December 19, 1996).

What followed was not what the 1996 architects intended. The agencies' own analysis of CAMELS data from 2000 to 2025 — cited in the proposal — found that while composite and component ratings generally move together, the Management component had become "the most influential factor in determining composite ratings, particularly in recent years." Industry feedback reinforced the finding: Management was overweighted relative to the financial condition components it nominally coordinated.

The mechanism was structural. Examiners reading the Management evaluation factors faced a list that included "responsiveness to recommendations from auditors and supervisory authorities," "management depth and succession," and "demonstrated willingness to serve the legitimate banking needs of the community." These are process and character assessments, not financial risk factors. Because they were embedded in the same component that received "special consideration," they had outsized leverage over outcomes that carry real regulatory weight — including "well-managed" status under 12 U.S.C. 1841(o)(9) and 12 U.S.C. 24a(g)(6), which conditions a bank's ability to engage in certain expansionary activities without prior regulatory approval.

What the Proposal Actually Changes

The proposal makes eight categories of changes. Three are the ones that matter.

First, the "special consideration" sentence is deleted. The proposed text states that the composite "generally bears a close relationship to the component ratings" and that "financial condition and material financial risks are the predominant considerations." This language explicitly removes M's structural advantage in composite construction.

Second, Management component ratings of 3 or worse now require a material financial risk threshold. Under the proposed framework, institutions generally receive such ratings "only when risk management practices result in material financial risk to the institution." Carve-outs exist for unreliable financial or regulatory reporting, failure to safeguard assets, and significant noncompliance with law or regulation — but the default presumption is inverted. Documentation deficiencies and succession gaps can no longer push a Management rating to 3 independently of any observable financial consequence.

Third, specialty review findings are substantially ringfenced. Consumer compliance, BSA/AML, CRA, and information systems findings currently flow routinely into the Management component and can drive composite downgrades even where no material financial risk exists. The proposal would confine specialty review findings to situations where they "impact an institution's overall financial condition, represent material financial risks, or reflect significant noncompliance with laws and regulations." The residual noncompliance carve-out matters and requires examiner judgment, but the structural default shifts.

The proposal also removes three specific Management evaluation factors: "Management depth and succession," "Responsiveness to recommendations from auditors and supervisory authorities," and "Demonstrated willingness to serve the legitimate banking needs of the community." These deletions are substantive. Succession planning and audit responsiveness were often the hooks sustaining a Management 3 at community banks where financial performance was otherwise adequate.

For the other five components, the proposal strips out broad language about "management's ability to identify, measure, monitor, and control" risks and replaces it with component-specific measurable factors. The "but not limited to" language is also gone — examiners can consider factors beyond the listed evaluation factors only in exceptional circumstances, and must document the rationale when they do. That constraint on examiner discretion is not cosmetic. It creates a paper trail that institutions can engage on appeal.

What "Focusing on Material Financial Risk" Means in Practice

FFIEC Chair Michelle Bowman, Vice Chair for Supervision of the Federal Reserve Board, described the proposal as marking "a decisive shift toward transparency, quantitative factors, and predictability of supervisory oversight." The operational translation for examiners is narrower scope and higher documentation burden when departing from listed factors. For boards, it means audit committee time devoted to policy revision cycles and examiner-responsiveness tracking is less directly connected to ratings outcomes. Risk committee agendas should shift toward forward-looking financial condition metrics and concentration risk indicators.

The Sensitivity to Market Risk component now explicitly includes "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." That addition points directly at institutions that experienced NIM volatility in 2022–2024 without receiving commensurate supervisory attention — because examiner focus was captured by the Management component's process checklist instead.

The Gould Dissent and What It Signals for the Final Rule

OCC Comptroller Jonathan Gould supported the proposal but published a statement on May 19, 2026 (NR 2026-39) that deserves careful reading. His concern: the proposal "does not sufficiently address 'double counting' within the Management, or M, component." His argument is that Management has historically reflected deficiencies "already captured in other components" — an asset quality problem generating a weak Asset Quality and a weak Management rating because management failed to identify credit risk. One set of facts, two rating hits. Gould called for Management to "serve as a standalone assessment rather than a secondary reflection of other components."

The agencies knew this problem existed when they published the proposal. Request for Comment question 10 asks directly whether the proposed changes "effectively limit consideration of a single finding when assigning multiple ratings," and question 7 asks whether the framework should set an explicit expectation that it would be rare for Management to be rated worse than satisfactory when all other components are satisfactory. Both questions are in the proposal because the answer isn't settled.

The trajectory is readable. The double-counting concern is now in the administrative record from the Comptroller himself. Commenters who argue the proposal resolves it will face that record. The final rule is more likely to add explicitness — through a presumption or documentation requirement when Management diverges significantly from other components — than to retreat from the proposal's direction. Institutions that want that resolution should say so clearly, citing questions 7 and 10.

Which Institution Types Are Most Affected

Community banks are the most direct beneficiaries. For institutions under $10 billion, the Management component has been the most common vehicle for downgrade risk arising from BSA/AML findings, CRA documentation issues, and audit-response gaps — conditions that rarely posed direct financial risk. The specialty review ringfencing alone, if adopted as proposed, changes the examination calculus at a meaningful number of institutions.

Regional banks with concentrated CRE or consumer lending portfolios face a more nuanced picture. If process-compliance deficiencies have been diverting examiner attention from Asset Quality and Earnings risks, the revised framework may sharpen scrutiny of those components precisely because the Management distraction is removed. The NIM and interest rate exposure factors in the enhanced Sensitivity component point at institutions that have been managing IRR reactively.

BaaS sponsor banks need to pay specific attention to the specialty review question. Information systems and compliance reviews of fintech partner programs have created pathways for program-level findings to elevate Management ratings at the sponsor institution. The proposed ringfencing raises the threshold, but the "significant noncompliance" carve-out leaves open how BSA/AML and consumer protection findings from partner programs will be calibrated. That ambiguity warrants direct comment.

Large banks are least affected in aggregate. Their examination complexity already generates differentiated component-level analysis, and process-compliance deficiencies are less likely to dominate Management ratings against a backdrop of complex financial condition assessments. The "well-managed" statutory hook remains relevant, but the direction of change is favorable.

What to Watch and Comment Letter Strategy

The August 17 deadline gives institutions roughly 90 days. Comment letters with the most traction should address three things: (1) whether the material financial risk threshold for Management ratings of 3 or worse is calibrated correctly and whether it should be codified with more specificity; (2) whether the "significant noncompliance" carve-out in the specialty review provision is defined clearly enough to prevent current practices from persisting through a definitional backdoor; and (3) whether the double-counting risk Gould identified should be resolved through an explicit presumption codified in the final rule.

The reputation risk deletion is not a live comment question. The Board, OCC, FDIC, and NCUA have already issued separate proposals and final rules removing reputation risk from their supervisory frameworks — at 91 FR 9499 (Federal Reserve Board, February 26, 2026), 91 FR 18279 (OCC, April 10, 2026), and 90 FR 48409 (FDIC, October 21, 2025). That change is settled and consistent with the broader direction.

Bottom Line

The Management component's "special consideration" language was a structural flaw that allowed process-compliance pressure to substitute for financial risk analysis across three decades of examinations. The proposed revision corrects that flaw in principle. Whether it corrects it in practice depends on how the final rule resolves the double-counting question that Comptroller Gould placed in the record and that the agencies themselves left open in questions 7 and 10. Institutions that engage substantively in the comment period have a real opportunity to shape an outcome that affects every examination cycle going forward. Those that do not comment will receive whatever the agencies agree on.

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