Skip to main content


In connection with a presentation I was asked to make by the Federal Home Loan Bank to some of its member banks, I crafted this article on “Coping with the CAMELS.” As you know, this is an acronym for the six ratings in commercial bank exams – Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Interest Rate Risk. Before we address each category, I would like to present some context on today’s regulatory environment as we have seen it evolve.

The Post-Financial Crisis Environment
It is hard to believe, but seven years have passed since the 2008 financial meltdown. While things have certainly improved and no longer are confrontational, I would say that the watchword for the regulators is still caution. Folks have a long memory and are concerned that a future economic downturn could produce elevated safety and soundness issues. Accordingly, banks need to be wary of an ever-changing economy. The recent stock market turmoil confirms that.

Compliance has become an increased focus post Dodd-Frank. Having a robust compliance program top down is the expectation. Board oversight and training has gotten heightened attention. Clearly, banks have had to staff up to meet regulatory expectations. No doubt the bar has been raised. The hot compliance focus of the day may change, but the level of compliance has been elevated, as have the related costs. As one banker summed it up well, “It is the cost of FDIC insurance, so deal with it.”

This is an evolving area that legitimately is becoming a high-priority concern with regulators. I personally view this as one of the biggest risks and challenges banks face in the near term, as sophisticated hackers infiltrate customer information.

M&A Activity
Healthy bank merger and acquisition activity has returned to a pretty steady pace as far as the number of deals, but deal size has dwindled lately. One aftermath of the financial crisis is the expectation by regulators that you informally discuss deals before they are signed and announced. It is simply the protocol in the New World. Actually, many clients who are active in deal-making keep an open dialogue with the regulators and periodically visit them. I recommend that all banks keep an open line of communication with their regulators and not just during exam time. A healthy relationship with your regulators is just good business. If you treat them as your partners, we have seen positive results.

Back to the CAMELS

  • Capital – I would say for the typical community bank an 8-10% Tier 1 ratio is the expectation with most banks above that now, depending on asset quality and composition, growth rates, earnings, and acquisition appetite. After all, capital is the cushion that protects the FDIC insurance fund.
  • Asset Quality – Having a classified asset ratio under 30% of Tier 1 capital is the expectation today. Clearly, asset quality will also play a key role in the regulators’ appetite for any expansion you have in mind.
  • Management – Maintaining at least a “2” rating in management is imperative, particularly for expansion activities. In fact, you are prohibited by Dodd-Frank from doing an interstate acquisition if you don’t have both a satisfactory management rating (“2”) and are well-capitalized. Also be advised, if you have an unsatisfactory compliance rating, expect your management rating to be down-graded to at least a “3.”
  • Earnings – While there is no magic number here, I would say at least a .6 percent or .7 percent ROAA is expected to achieve a “2” rating. I sense that number will go up towards 1.0% over time and if and when interest rates rise again. Other factors, such as capital, asset quality, and growth also factor into the equation.
  • Sensitivity to Interest Rate Risk – Clearly, the regulators would like to see you pretty much interest rate neutral. Most banks are slightly asset sensitive. A 100 basis swing should be manageable, but enhanced interest rate stress testing will be the norm. In addition, we have seen an expectation of about 15% on balance sheet liquidity. In that vein, more careful scrutiny of the quality and length of the investment portfolio should be anticipated.

While the regulatory world is far more stable and predictable now, still expect some caution on their part. Keeping your regulators informed is the norm now. The “no surprises” rule is a good one to follow. Hopefully, the above summary, while not earthshaking, will provide some practical insights and reaffirm others you may already have.

  Edit this post