Reference: FIL-23-2026
Official publication: Read the full FIL-23-2026 on the agency website
On May 19, 2026, the Federal Financial Institutions Examination Council (FFIEC), acting through its constituent agencies including the Federal Deposit Insurance Corporation (FDIC), released a significant proposal to modernize the Uniform Financial Institutions Rating System (UFIRS). Commonly referred to as the CAMELS rating system, this framework has served as the bedrock of supervisory evaluation for thirty years. The proposed revisions signal a fundamental shift in regulatory philosophy, moving away from a historically heavy emphasis on procedural documentation and governance formalities toward a more granular assessment of material financial risks. As the banking landscape has grown increasingly complex—driven by digital transformation, evolving liquidity dynamics, and new asset classes—this update seeks to ensure that supervisory ratings are a more accurate reflection of an institution’s actual safety and soundness rather than its adherence to bureaucratic checklists.
Executive Summary
- Shift to Materiality: The proposal explicitly prioritizes the identification and assessment of factors that pose a material financial risk to an institution’s condition, rather than focusing on technical or non-material procedural deficiencies.
- Management Component De-Emphasis: A pivotal change involves removing the long-standing requirement for examiners to give “special consideration” to the Management component when determining a composite rating, aiming to prevent management scores from artificially anchoring the overall rating.
- Clarified Rating Definitions: The 1-through-5 rating scale is being redefined with more descriptive language to clearly distinguish between “strong” performance and “material financial risk,” providing greater transparency for bank boards and executives.
- Specialty Review Integration: The impact of specialty examinations, such as IT, Trust, and BSA/AML, will be moderated in the CAMELS framework unless the findings present a clear and material threat to the institution’s overall financial viability.
- Modernized Evaluation Factors: Each of the six components (Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk) will see updated evaluation criteria reflecting the current economic and operational environment.
What the Regulator Issued
The FDIC, in coordination with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, issued a notice and request for comment regarding proposed revisions to the Uniform Financial Institutions Rating System. This release represents the first comprehensive update to the UFIRS framework since its last major revision in 1996. According to the notice, the agencies believe that while the core components of CAMELS remain relevant, the application of the rating system has occasionally become overly focused on qualitative management processes at the expense of quantitative financial health indicators.
The proposal introduces a more rigorous definition of what constitutes a threat to safety and soundness. Central to the issuance is the concept that supervisory resources should be allocated based on risk materiality. By refining the language used in component descriptions, the regulators intend to reduce the ambiguity that often leads to friction during the exam exit process. The agencies specifically noted that the goal is to “ensure that ratings reflect actual safety and soundness threats rather than just governance formality,” a move that many industry observers view as a response to criticisms regarding the subjectivity of the Management component.
Who Is Impacted
This proposal has broad implications for all federally insured depository institutions, including national banks, state-member and non-member banks, and savings associations. Within these institutions, the following stakeholders are most directly impacted:
- Boards of Directors: Directors will need to understand the new rating definitions, as these scores often dictate the intensity of supervisory oversight and can trigger mandatory corrective actions.
- C-Suite Executives: Chief Executive Officers and Chief Risk Officers must recalibrate their internal reporting to align with the regulators’ focus on material financial risk rather than just compliance checkboxes.
- Compliance and Audit Functions: Internal audit teams will likely need to update their risk assessment methodologies to ensure they are capturing the materiality thresholds emphasized in the new FFIEC guidance.
- Legal Counsel: Attorneys advising institutions during the examination process will need to focus their advocacy on the lack of materiality of specific examiner findings under the revised framework.
Key Dates and Deadlines
The agencies are seeking feedback from the industry and the public on all aspects of the proposal. The formal comment period is currently open and is scheduled to conclude on August 17, 2026. Financial institutions and trade associations are encouraged to submit detailed comments, particularly regarding the definitions of “materiality” and the proposed treatment of specialty exam findings. Following the comment period, the FFIEC will review the feedback before issuing a final rule, which is expected to take effect in early 2027.
Practical Action Checklist
In light of these proposed changes, institutions should consider the following operational steps to prepare for a transition to the modernized CAMELS framework:
- Conduct a Gap Analysis: Review current internal risk assessment processes against the proposed materiality-focused definitions to identify areas where the institution may be over-relying on procedural documentation.
- Recalibrate Management Reporting: Ensure that Board reporting packages emphasize material financial risks and trends, reflecting the expected shift in examiner focus away from “special consideration” of management processes.
- Review Specialty Exam Readiness: Assess how IT and Trust findings are currently communicated to the Board and determine if those findings would meet the new “materiality” threshold for impacting the composite CAMELS rating.
- Update Training Programs: Inform senior management and business line leaders about the proposed changes to the 1-through-5 rating scale and what specific financial indicators are now prioritized.
- Formalize Materiality Thresholds: Develop a clear internal framework for what constitutes a “material financial risk” within the institution’s specific risk profile and business model.
- Engage in the Comment Process: Prepare a response to the FDIC and FFIEC, especially if the institution has concerns about how examiners will distinguish between “minor weaknesses” and “material risks” in practice.
- Audit the ‘S’ Component: Given the focus on modernizing all factors, pay close attention to the Sensitivity to Market Risk component, ensuring that interest rate risk models are robust and reflect current market volatility.
- Monitor Earnings Quality: Review the Earnings component criteria to ensure that “sustainable earnings” are clearly demonstrated, as the proposal looks to tighten the link between profitability and long-term viability.
- Assess Liquidity Stress Testing: Verify that liquidity risk management practices are not merely compliant with old guidance but are dynamically identifying potential material threats in a rapid-outflow environment.
- Review Historic Exam Findings: Re-examine previous Matters Requiring Attention (MRAs) to determine if they would be classified differently under a materiality-focused regime.
Open Questions / Watch Items
While the proposal provides a clearer roadmap for future examinations, several areas of uncertainty remain that institutions should monitor closely. Chief among these is the practical implementation of the “materiality” standard. Because materiality can be subjective, there is a risk that different examination teams may apply the threshold inconsistently across various regions or institution sizes. The industry should watch for whether the final rule provides quantitative benchmarks or remains purely qualitative.
Another significant watch item is the impact of this change on Enforcement Actions. Historically, a downgrade in the Management component was often a precursor to a Cease and Desist Order or a Formal Agreement. If the Management component no longer receives “special consideration,” it remains to be seen whether regulators will find new justifications for formal interventions or if the overall volume of enforcement activity will decrease. Finally, the treatment of third-party risk and fintech partnerships within the modernized framework is not fully detailed in the current proposal and will likely require further clarification from the agencies.
My Law Tampa publishes this memorandum as part of our ongoing commitment to providing timely and sophisticated legal analysis of regulatory developments affecting the financial services industry. Our focus is on translating complex federal mandates into actionable insights for the institutions we serve in Florida and across the nation.
This memorandum is provided for informational purposes only and does not constitute legal advice. The information contained herein is based on current regulatory proposals which are subject to change. The distribution of this material does not create an attorney-client relationship between the reader and My Law Tampa.
Source Materials
- Official publication: FIL-23-2026
- Regulator archive: FDIC memo archive
- Memo library: browse the full regulatory memo archive
- Related memo: FDIC Compliance: Analysis of the 2026 Updated Q&A on Official Signs and Advertising Requirements
- Related memo: FDIC Announces Supervisory Relief for Northern Mariana Islands Following Typhoon Sinlaku
- Related memo: FDIC Supervisory Relief: Navigating Hawaii’s Recovery from Low Weather Systems
