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Notice2026-09944

Uniform Financial Institutions Rating System

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Published

May 19, 2026

Issuing agencies

Federal Financial Institutions Examination Council

Abstract

The Federal Financial Institutions Examination Council (FFIEC) is requesting comment on proposed revisions to the Uniform Financial Institutions Rating System (UFIRS), commonly referred to as the CAMELS rating system. The proposal would strengthen the link between CAMELS ratings and a financial institution's safety and soundness by focusing component and composite ratings on factors that materially affect an institution's financial condition and risk profile, and by improving the transparency of CAMELS ratings.

Full Text

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<title>Federal Register, Volume 91 Issue 96 (Tuesday, May 19, 2026)</title>
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[Federal Register Volume 91, Number 96 (Tuesday, May 19, 2026)]
[Notices]
[Pages 29128-29139]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-09944]

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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

[Docket ID OCC-2026-0562]

Uniform Financial Institutions Rating System

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice and request for comment.

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SUMMARY: The Federal Financial Institutions Examination Council (FFIEC)
is requesting comment on proposed revisions to the Uniform Financial
Institutions Rating System (UFIRS), commonly referred to as the CAMELS
rating system. The proposal would strengthen the link between CAMELS
ratings and a financial institution's safety and soundness by focusing
component and composite ratings on factors that materially affect an
institution's financial condition and risk profile, and by improving
the transparency of CAMELS ratings.

[[Page 29129]]

DATES: Comments must be received by August 17, 2026.

ADDRESSES: Commenters are encouraged to submit comments through the
Federal eRulemaking Portal. Please use the title ``Uniform Financial
Institutions Rating System'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
<bullet> Federal eRulemaking Portal--<a href="http://Regulations.gov">Regulations.gov</a>: Go to <a href="https://regulations.gov/">https://regulations.gov/</a>. Enter Docket ID OCC-2026-0562 in the Search Box and
click ``Search.'' Public comments can be submitted via the ``Comment''
box below the displayed document information or by clicking on the
document title and then clicking the ``Comment'' box on the top-left
side of the screen. For help with submitting effective comments please
click on ``Commenter's Checklist.'' For assistance with the
<a href="http://Regulations.gov">Regulations.gov</a> site, please call 1-866-498-2945 (toll free) Monday-
Friday, 9 a.m.-5 p.m. ET, or email <a href="/cdn-cgi/l/email-protection#b6c4d3d1c3dad7c2dfd9d8c5ded3dac6d2d3c5ddf6d1c5d798d1d9c0">[email&#160;protected]</a>.
<bullet> Mail: Executive Secretary, Federal Financial Institutions
Examination Council, L. William Seidman Center, Mailstop: E-2035-c,
3501 Fairfax Drive, Arlington, VA 22226-3550.
<bullet> Hand Delivery/Courier: Executive Secretary, Federal
Financial Institutions Examination Council, L. William Seidman Center,
Mailstop: E-2035-c, 3501 Fairfax Drive, Arlington, VA 22226-3550.
Instructions: You must include ``FFIEC'' as the agency name and
Docket ID OCC-2026-0562 in your comment. In general, all comments
received will be entered into the docket and published on the
<a href="http://Regulations.gov">Regulations.gov</a> website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this action by the following method:
<bullet> Viewing Comments Electronically--<a href="http://Regulations.gov">Regulations.gov</a>: Go to
<a href="https://regulations.gov/">https://regulations.gov/</a>. Enter Docket ID OCC-2026-0562 in the Search
Box and click ``Search.'' Click on the ``Documents'' tab and then the
document's title. After clicking the document's title, click the
``Document Comments'' tab. Comments can be viewed and filtered by
clicking on the ``Sort By'' drop-down on the right side of the screen
or the ``Refine Results'' options on the left side of the screen.
Supporting materials can be viewed by clicking on the ``Documents''
tab. Click on the ``Sort By'' drop-down on the right side of the screen
or the ``Refine Documents Results'' options on the left side of the
screen checking the ``Supporting & Related Material'' checkbox. For
assistance with the <a href="http://Regulations.gov">Regulations.gov</a> site, please call 1-866-498-2945
(toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email
<a href="/cdn-cgi/l/email-protection#04766163716865706d6b6a776c6168746061776f446377652a636b72">[email&#160;protected]</a>. The docket may be viewed after the close
of the comment period in the same manner as during the comment period.

FOR FURTHER INFORMATION CONTACT:
Board: Division of Supervision and Regulation: Anna Lee Hewko,
Associate Director, (202) 250-1577, Todd Vermilyea, Senior Advisor,
(202) 604-7418, Morgan Lewis, Manager, (202) 407-5093, Ryan Engler,
Senior Financial Institution Policy Analyst, (202) 868-0565; Legal
Division: Jay Schwarz, Deputy Associate General Counsel, (202) 452-
2970, David Cohen, Counsel, (202) 452-5259, Vivien Lee, Attorney, (202)
452-2029, Daniel Parks, Attorney, (771) 210-7183.
CFPB: Supervision Division: David Thomas, Senior Counsel, (202)
435-9040, <a href="/cdn-cgi/l/email-protection#d9bdb8afb0bdf7adb1b6b4b8aa99babfa9bbf7beb6af">[email&#160;protected]</a>.
FDIC: Division of Risk Management Supervision: Suzanne Clair,
Associate Director (Capital Markets), (703) 254-0454, <a href="/cdn-cgi/l/email-protection#44170728252d360402000d076a232b32">[email&#160;protected]</a>;
Brittany Audia, Chief, Exam Support Section, (703) 254-0801,
<a href="/cdn-cgi/l/email-protection#ca888bbfaea3ab8aacaea3a9e4ada5bc">[email&#160;protected]</a>; Legal Division, Nefretete Smith, Supervisory Counsel,
(202) 898-6851, <a href="/cdn-cgi/l/email-protection#f8b69d9eab95918c90b8bebcb1bbd69f978e">[email&#160;protected]</a>; Lauren Whitaker, Counsel, (202) 898-
3872, <a href="/cdn-cgi/l/email-protection#9af6edf2f3eefbf1ffe8dafcfef3f9b4fdf5ec">[email&#160;protected]</a>; Maureen Murat, Senior Attorney, (202) 898-
7143, <a href="/cdn-cgi/l/email-protection#9af7f7efe8fbeedafcfef3f9b4fdf5ec">[email&#160;protected]</a>.
NCUA: Office of Examination and Insurance: Simon Hermann, Senior
Credit Specialist, <a href="/cdn-cgi/l/email-protection#fd8e95988f909c9393bd939e889cd39a928b">[email&#160;protected]</a>; or Julie Decker, Risk Officer,
<a href="/cdn-cgi/l/email-protection#2e444a4b4d454b5c6e404d5b4f00494158">[email&#160;protected]</a> at (703) 518-6360; Office of General Counsel: Ian
Marenna, Associate General Counsel for Regulations and Legislation,
<a href="/cdn-cgi/l/email-protection#ff96929e8d9a91919ebf919c8a9ed1989089">[email&#160;protected]</a>; or Gira Bose, Staff Attorney, <a href="/cdn-cgi/l/email-protection#583f3a372b3d18363b2d39763f372e">[email&#160;protected]</a>; at
(703) 518-6540; National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314.
OCC: Chief National Bank Examiner Office: Heather Gilmore, Lead
Expert, (202) 215-7760, <a href="/cdn-cgi/l/email-protection#355d5054415d50471b525c59585a4750755a56561b41475054461b525a43">[email&#160;protected]</a>; Caroline Stuart,
Analyst to the Deputy Comptroller, (202) 649-8412,
<a href="/cdn-cgi/l/email-protection#2f4c4e5d404346414a015c5b5a4e5d5b6f404c4c015b5d4a4e5c01484059">[email&#160;protected]</a>; Chief Counsel's Office: Marjorie Dieter,
Counsel, (202) 649-5490, <a href="/cdn-cgi/l/email-protection#412c20332b2e3328246f252824352433012e22226f35332420326f262e37">[email&#160;protected]</a>.
SLC: Mary Beth Quist, Senior Vice President--Bank Supervision, 202-
728-5722, <a href="/cdn-cgi/l/email-protection#f4999685819d8780b497879687da9b8693">[email&#160;protected]</a>.; Legal: Matt Lambert, Deputy General
Counsel, 202-407-7130, <a href="/cdn-cgi/l/email-protection#ff92939e929d9a8d8bbf9c8c9d8cd1908d98">[email&#160;protected]</a>.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Federal Financial Institutions Examination Council Act of 1978
(``FFIEC Act'') authorizes the FFIEC \1\ to prescribe principles and
standards for the federal examination of financial institutions and to
make recommendations to promote consistency and coordination in the
supervision of institutions.\2\ Pursuant to this authority, the FFIEC
developed and recommended adoption of the UFIRS in 1979.\3\ The UFIRS
is a comprehensive supervisory rating system used by Federal and State
supervisory agencies (together, ``supervisory agencies'') for
evaluating the safety and soundness of financial institutions \4\ on a
uniform basis and for identifying those institutions requiring special
attention or concern.\5\ The supervisory agencies use the UFIRS to,
among other purposes, monitor the severity of problems that financial
institutions may be experiencing, determine the level of supervisory
concern that is warranted, and monitor aggregate trends in the
condition of financial institutions.
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\1\ The agencies represented on the FFIEC are the Board of
Governors of the Federal Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), the National Credit Union
Administration (NCUA), the Office of the Comptroller of the Currency
(OCC), and the Consumer Financial Protection Bureau (CFPB), plus a
State Liaison Committee (SLC) representing state agencies. The SLC
consists of five representatives from state regulatory agencies that
supervise financial institutions. The representatives are appointed
for two-year terms. The SLC Chairman, a voting member of the
Council, is elected by the SLC members for a one-year term and can
be re-elected for additional terms. The functions of the Council
include establishing principals and standards, making
recommendations regarding supervisory matters and adequacy of
supervisory tools, and developing a uniform reporting system.
\2\ 12 U.S.C. 3301 et seq.
\3\ See Circular No. 79-191 (Nov. 29, 1979) ``Uniform Rating
System,'' available at <a href="https://fraser.stlouisfed.org/files/docs/historical/frbdal/circulars/frbdallas_circ_19791129_no79-191.pdf">https://fraser.stlouisfed.org/files/docs/historical/frbdal/circulars/frbdallas_circ_19791129_no79-191.pdf</a>.
\4\ The term ``financial institution'' as used in this
``Supplementary Information'' section refers to those insured
depository institutions whose primary Federal supervisory agency is
represented on the FFIEC and includes Federally supervised
commercial banks, savings and loan associations, mutual savings
banks, and credit unions. Federal and State supervisory agencies may
choose to adopt the UFIRS when evaluating other types of supervised
organizations.
\5\ Because the CFPB does not examine the institutions it
supervises for safety and soundness, the CFPB does not use the
UFIRS.
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The 1979 UFIRS established a uniform framework to evaluate a

[[Page 29130]]

financial institution's financial condition, compliance with laws and
regulations, and overall operating soundness.\6\ In 1996, the FFIEC
revised the UFIRS to, among other changes, include a sixth component
rating addressing sensitivity to market risks, place greater emphasis
on risk management practices, and require examiners to consider an
institution's size, complexity, and risk profile when evaluating each
component rating.\7\
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\6\ See Circular No. 79-191 (Nov. 29, 1979) ``Uniform Rating
System,'' at 1,available at <a href="https://fraser.stlouisfed.org/files/docs/historical/frbdal/circulars/frbdallas_circ_19791129_no79-191.pdf">https://fraser.stlouisfed.org/files/docs/historical/frbdal/circulars/frbdallas_circ_19791129_no79-191.pdf</a>.
\7\ See 61 FR 37472 (July 18, 1996) and 61 FR 67021 (Dec. 19,
1996).
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Under the current UFIRS, each financial institution is assigned
CAMELS component and composite ratings on a scale of 1 to 5, with 1
being the highest rating. The composite rating is assigned based on an
evaluation and rating of six essential components of an institution's
financial condition and operations: Capital Adequacy, Asset Quality,
Management, Earnings, Liquidity, and Sensitivity to Market Risk. The
ratings assigned under UFIRS can have several implications for
financial institutions.\8\
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\8\ For example, under the BHC Act and the National Bank Act, a
financial institution's UFIRS composite and Management component
ratings are relevant to its ``well managed'' status, which may,
among other benefits, allow the institution to engage in certain
expansionary activities without prior approval from regulators. See
12 U.S.C. 1841(o)(9), 12 U.S.C. 24a(g)(6).
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Given the importance of the UFIRS framework and the many changes
that have occurred in the banking industry and in supervisory practices
since the rating system was updated in 1996, the FFIEC conducted a
review of the framework to inform the proposed changes. The review
considered a wide body of relevant academic literature, which indicates
that CAMELS ratings contain important information about the overall
condition of financial institutions, including information that is not
readily available from balance sheet metrics or other publicly
available materials. For a specific discussion of some of the
literature, see Section IV. Expected Effects. The FFIEC review also
considered existing industry commentary related to the application of
CAMELS ratings. An observation from industry is that the Management
rating has been overweighted relative to other CAMELS components in
determining the composite rating. The supervisory agencies analyzed
CAMELS ratings from 2000 to 2025 and found that while composite and
component ratings generally move together, their correlation can vary
significantly over time. The supervisory agencies' analysis suggested
that the Management component has been the most influential factor in
determining composite ratings, particularly in recent years.

II. Proposed Changes to the UFIRS

Following the FFIEC's review of the UFIRS framework, the agencies
are proposing to retain the basic framework of the existing rating
system, with certain modifications to the composite and component
rating definitions and evaluation factors. Specifically, the proposed
revisions would emphasize factors that materially affect an
institution's financial condition and risk profile. The proposal would
emphasize consideration of material financial risks over concerns
related to policies, procedures, and documentation, thus helping to
ensure that ratings accurately reflect the issues most likely to impact
safety and soundness. The proposed changes would also improve
transparency by more clearly articulating expectations for financial
institutions. These updates would improve the effectiveness of the
UFIRS as a supervisory tool and increase the public's confidence in
supervisors' assessment of the banking system. Additionally, certain of
the proposed changes would also be responsive to comments received from
the Economic Growth and Regulatory Paperwork Reduction Act public
notices and public outreach meetings.\9\
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\9\ Public Law 104-208, Div. A, Title II, section 2222, 110
Stat. 3009-414, (1996) (codified at 12 U.S.C. 3311). See also
Regulatory Publication and Review Under the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, 89 FR 99,751 (Dec. 11,
2024).
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This section summarizes the proposed changes to the UFIRS. The text
of the proposed UFIRS can be found in Appendix A of this Supplementary
Information.

A. Remove ``Special Consideration'' Given to the Management Rating in
the Composite Rating

The current UFIRS framework states that the Management component is
given ``special consideration'' when assigning a composite rating. The
proposal would remove the sentence directing examiners to give
``special consideration'' to the Management component in the composite
rating.
Although the effectiveness of a financial institution's board of
directors and management is an important aspect of its overall safety
and soundness, the current language could be interpreted as diminishing
the relative importance of the non-Management components in the
determination of composite ratings. Removing the ``special
consideration'' given to the Management component in assigning
composite ratings would ensure that supervisors take a more balanced
approach that appropriately considers all component ratings. This would
result in a composite rating that better reflects a financial
institution's overall financial condition and risk profile.

B. Changes to the Management Component Rating

The FFIEC proposes to make several changes to the Management
component's evaluation factors and rating definitions. The proposed
changes to the evaluation factors limit the Management component's
evaluation factors to the most material aspects of risk management,
helping to strengthen the link between supervisory ratings and safety
and soundness. Specifically, the proposal would remove factors related
to: ``Management depth and succession,'' ``Responsiveness to
recommendations from auditors and supervisory authorities,'' and
``Demonstrated willingness to serve the legitimate banking needs of the
community,'' to focus on the most material aspects of risk management.
The factor related to the overall performance of the institution and
its risk profile would be removed to limit redundancy, since it would
be addressed through the composite and other component ratings.
The proposed changes to the Management component rating definitions
include establishing a material financial risk threshold for assigning
Management ratings of 3 or worse based on risk management weaknesses.
Institutions would generally receive such ratings only when risk
management practices result in material financial risk to the
institution. Institutions that have unreliable financial or regulatory
reporting, have failed to safeguard assets, or are in significant
noncompliance with law or regulation may also be assigned a Management
component rating of 3 or worse. These proposed revisions would better
align the severity of Management ratings with the risk to the
institution's safety and soundness.

C. Treatment of Specialty Review Findings

Under the current UFIRS framework, supervisory findings from
specialty reviews \10\ are often incorporated into

[[Page 29131]]

the Management component rating and can contribute to ratings
downgrades even when they do not reflect material financial risks to
the institution. The proposal would clarify that these specialty review
findings would influence the CAMELS composite and component ratings to
the extent that the findings impact a financial institution's overall
financial condition, represent material financial risks, or reflect
significant noncompliance with laws and regulations. The proposed
changes to the influence of specialty review findings would promote
component and composite ratings that better reflect material financial
risks.
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\10\ Specialty review areas include Compliance (e.g., Consumer
Compliance, Bank Secrecy Act/Anti-Money Laundering), Community
Reinvestment, Government Security Dealers, Information Systems,
Municipal Security Dealers, Transfer Agent, and Trust.
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D. Revisions to Composite Rating Definitions

The current UFIRS framework includes a definition for composite
ratings 1 through 5 to provide supervisors with specific considerations
that should drive the determination of a financial institution's
composite rating. The proposal would make changes to composite rating
definitions to align with the broader approach of ensuring that the
UFIRS focuses on an institution's financial condition and risk profile,
with emphasis on material financial risks. Specifically, the proposal
would revise the composite 1 and 2 definitions to clarify that
financial institutions with these ratings have strong or satisfactory
financial performance, respectively, and only minor or moderate risk
management weakness. The proposal would change the composite 3
definition to state that financial institutions that receive this
rating should exhibit less than satisfactory financial performance or
inadequate risk management practices that result in material financial
risk to the institution. Institutions that exhibit significant
noncompliance with laws and regulations may also be assigned a 3
rating. The proposal would also change the definition of a composite
rating of 4 to state that financial institutions that receive this
rating should exhibit ``deficient'' financial performance. Risk
management weaknesses that do not result in observable deterioration of
financial condition or material financial risk would not alone support
a composite rating of 4 or worse. Finally, the proposal would state
that firms rated a composite 5 should exhibit critically deficient
financial performance. By establishing clearer thresholds for these
ratings, the proposal would help ensure that ratings of 3 or worse are
more fully supported by evidence of weaknesses that materially impact
the safety and soundness of the institution.

E. Clarifying Language on Risk Management

Under the current UFIRS framework, the component descriptions and
evaluation factors include broad language regarding the ``ability of
management to identify, measure, monitor, and control'' risks. The
proposal would remove broad language within Capital Adequacy, Asset
Quality, Earnings, Liquidity and Sensitivity to Market Risk components
and, where appropriate, would focus on more specific risk management
factors relevant to an assessment of a given component. For example,
the proposal would replace the Liquidity component's evaluation factor
referencing 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,'' to instead consider ``the effectiveness of funds management
practices, including contingency funding plans and cash flow
forecasting.'' Similarly, the proposal would replace the Capital
Adequacy component's evaluation factor concerning ``the ability of
management to address emerging needs for additional capital'' to
instead include consideration of ``the institution's effectiveness in
maintaining capital levels commensurate with its risk profile and
strategic priorities through a range of economic conditions.'' \11\ The
Management component's description would continue to reference the
effectiveness of the board of directors and management, in their
respective roles, to identify, measure, monitor, and control material
financial risks associated with an institution's activities; however,
the Management component's evaluation factors would also be revised in
the proposed framework to enhance specificity and measurability.
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\11\ The proposal would similarly specify risk management
practices in the asset quality component rating (the ``effectiveness
of risk monitoring practices and timely collection of problem
assets''); the earnings component rating (the ``effectiveness of
budgeting and income and expense forecasting''); and the sensitivity
to market risk component rating (the ``adequacy of market risk
measurement and control practices given the institution's scale and
activities'').
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The effectiveness of a financial institution's risk management is
an important aspect of its overall safety and soundness and its
supervisory ratings. Increasing the specificity of component evaluation
factors related to risk management would help to ensure that risk
management factors that are most impactful to financial condition and
risk profile are accurately reflected in the CAMELS ratings. The
proposed changes would also clarify for financial institutions what
specific risk management practices are relevant to each component,
thereby increasing transparency.

F. Clarifying Evaluation Factors

The current UFIRS framework states that component ratings will be
based on ``but not limited to'' an assessment of a specific set of
evaluation factors unique to each component. The proposed framework
would remove the ``but not limited to'' language from all of the CAMELS
components' descriptions and replace it with a general paragraph,
applicable to all components, that would allow for additional
evaluation factors to be considered only if warranted by exceptional
circumstances or evolving business practices. Under the proposal, the
consideration of additional evaluation factors must be critical to the
assessment of an institution's financial condition or risk profile with
emphasis on material financial risks. The proposal sets an explicit
expectation that examiners would document and explain the rationale for
inclusion of such additional factors. This proposed revision would
provide greater certainty to and transparency around the rating
evaluation factors that would be considered in the assessment.
The proposal would also modify certain evaluation factors to
improve clarity around the scope of supervisory evaluations. For
example, the proposal would revise the Capital Adequacy component to
clarify that risks related to contingent liabilities would be
considered in the evaluation factors. The proposal would also revise
the Earnings component's evaluation factors to clarify that a financial
institution's funding costs and earnings exposure to commodity prices
would be considered. Additionally, the proposal would amend the
Sensitivity to Market Risk component to explicitly include an
evaluation of recent net interest income performance in response to the
interest rate environment, expectations for net interest income based
on the balance sheet position, and exposure to interest rate
volatility. More clearly defining the CAMELS components' evaluation

[[Page 29132]]

factors would help to further standardize evaluations and better ensure
that examiners and financial institutions prioritize issues that
materially affect an institution's financial condition and risk
profile. The proposed revisions would also improve the transparency of
the UFIRS by establishing clearer expectations for financial
institutions with respect to the specific evaluation factors that
influence ratings and examination outcomes.

G. Improving Consistency, Structure, and Approach to Ratings
Definitions

The current framework includes a description of the ratings, 1
through 5, for each component; however, they differ in language,
structure, and level of detail. The proposal would introduce more
consistent terminology and a more streamlined structure, focusing on
the financial condition and risk management aspects of the CAMELS
component rating definitions, where applicable. For example, the
proposal would use the terms ``strong,'' ``satisfactory,'' ``less than
satisfactory,'' ``deficient,'' and ``critically deficient'' to describe
financial condition. For descriptions of risk management practices, the
proposal would use the terms ``effective,'' ``adequate,''
``inadequate,'' and ``deficient.'' Specific descriptions of risk
management practices would be removed from the 5 ratings for all but
the Management component. These proposed changes would introduce more
consistent terminology and structure to these descriptions to better
articulate the degree of deterioration in financial condition and/or
risk management practices required to support a given composite or
component rating. Such changes would also improve transparency of the
framework by establishing clearer expectations for financial
institutions.

H. Modernizing and Conforming Framework Language

The FFIEC proposes to modernize and conform language throughout the
framework and to update terminology to reflect current industry
standards and accounting practices. For example, references to
``allowances for loan and lease losses'' (ALLL) would be replaced with
``allowances for credit losses'' (ACL) to conform with the Current
Expected Credit Losses (CECL) accounting standard adopted under U.S.
GAAP in 2023. The proposal would also remove all references to
reputation risk, consistent with the policies of the Board, OCC, FDIC,
and NCUA.\12\
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\12\ The Board, OCC, FDIC and NCUA recently issued proposals or
final rules to remove the consideration of reputation risk from
their supervisory frameworks; See 91 FR 9499 (February 26, 2026); 91
FR 18279 (April 10, 2026); 90 FR 48409 (October 21, 2025).
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Modernizing and conforming the framework's language would improve
clarity, precision, and accessibility for institutions of all sizes,
facilitating more effective risk management and supervisory
communication.

III. Request for Comments

The FFIEC requests comment on the proposed changes to the rating
system. In addition, the FFIEC invites comments on the following
questions:
1. To what extent would the proposed revisions enhance the
effectiveness of UFIRS as a supervisory tool for evaluating the safety
and soundness of financial institutions? Should the framework be
modified to further strengthen the link between supervisory ratings and
safety and soundness, and if so, how?
2. To what extent do the proposed revisions appropriately balance
consideration of an institution's financial condition and risk profile
when assigning ratings? Should the CAMELS composite or component rating
definitions and/or evaluation factors be adjusted in other ways to
balance consideration of financial condition and risk profile when
evaluating an institution's safety and soundness? If so, how?
3. To what extent should the agencies consider ``evolving business
practices'' in determining additional evaluation factors that are
critical to an assessment of an institution's financial condition or
risk profile with emphasis on material financial risks? What should the
agencies consider as ``evolving business practices''?
4. How should compliance with laws and regulations be considered
within the composite and component ratings? To what extent is the
proposal's consideration of compliance with laws and regulations in the
composite and Management component ratings appropriately calibrated?
What are the advantages and disadvantages of differentiating between
issues that present material financial risks and those that do not? To
what extent should the UFIRS framework account for the type, severity,
frequency, and/or management's role with respect to a violation of law
or regulation and/or the violation's connection to material financial
risk?
5. The proposal limits inclusion of specialty review findings in
the UFIRS framework to those that impact an institution's overall
financial condition or pose material financial risk. What threshold of
findings should warrant specialty review findings to be included in the
component and composite ratings? To what extent should specialty review
findings specifically influence the Management rating?
6. In addition to the proposed changes to rating evaluation factors
and definitions, to what extent should the framework set the
expectation that an institution's composite rating bears a close
relationship with the CAMELS component ratings, with no single
component rating driving the composite rating? What are the advantages
and disadvantages of the framework setting forth the explicit
expectation that if one component rating is driving the composite
rating, additional justification is needed?
7. To what extent should the framework set the expectation that the
Management rating reflects the institution's management and overall
financial condition and material financial risk, and therefore it
should be rare, and additional justification would be needed for
Management to be rated less than satisfactory when all other components
are satisfactory? What would be the advantages and disadvantages of
setting such an expectation?
8. To what extent should the Management component's evaluation
factors directly consider whether compensation is excessive? What would
be the advantages and disadvantages of limiting the evaluation factor
to the avoidance of self-dealing and conflicts of interest? What other
factors, if any, should be considered that address misaligned
incentives and principal-agent risks?
9. To what extent should the Management component's evaluation
factors consider whether directors and management are affected by, or
susceptible to, dominant influence or concentration of authority?
10. Do proposed framework changes to the Management component
rating effectively limit consideration of a single finding when
assigning multiple ratings? To what extent could inclusion of
compliance with laws and regulations within the Management rating
result in the redundant consideration of a single noncompliance issue?
11. To what extent does the additional specificity in the rating
definitions and evaluation factors for the Sensitivity to Market Risk
rating improve clarity of supervisory expectations? Are there

[[Page 29133]]

ways to further refine the evaluation factors and ratings definitions
to better reflect how interest rates, foreign exchange rates, commodity
prices, or other financial instrument prices can affect a financial
institution's earnings or capital?

IV. Expected Effects

If adopted, the proposal would require the supervisory agencies to
implement the proposed revisions described above into the process for
assigning CAMELS ratings. The following sections discuss qualitatively
some benefits and costs of the proposal, relative to a baseline in
which the UFIRS framework that is currently applied to institutions
under the supervision of the agencies remains unchanged.

A. Benefits to Institutions

The proposal, if adopted, would pose two types of benefits to
supervised institutions: (1) more efficient use of management time and
resources, and (2) more transparency in supervisory expectations of
institutions. The expected benefits of the proposed revisions derive,
in part, from focusing supervision on factors that materially impact an
institution's financial condition and risk profile. This should support
financial institutions in addressing their material risks in a more
efficient and effective manner relative to the baseline, potentially
enhancing their safety and soundness and contributing to the safety and
soundness of the banking system overall. The proposed framework's
reduced focus on process-related issues that do not pose material
financial risk and narrowing of the deficiencies within the scope of
the Management criteria, may allow institutions to reallocate
resources.
Further, under the proposed framework, financial institutions with
strong financial metrics and risk profiles would likely be issued
satisfactory CAMELS ratings. Research suggests that CAMELS ratings
significantly affect lending behavior and bank performance, after
attempting to control for some other factors, with downgraded banks
exhibiting substantially lower loan growth (Kupiec et al., 2017).\13\
During the financial crisis, small banks that experienced ratings
downgrades expanded commercial and industrial loans and commercial real
estate loans less than banks maintaining healthy ratings (Kiser et al.,
2016).\14\ To the extent that ratings downgrades owing to process-
related issues that are immaterial to an institution's financial
condition have historically constrained financial institutions'
willingness or ability to engage in expansionary activities including
lending, the new framework could support increased credit availability.
Also, an overemphasis on process-related immaterial issues could have
allowed material financial risks to not be appropriately reflected in
the ratings under the current framework.
---------------------------------------------------------------------------

\13\ Paul Kupiec, Yan Lee and Claire Rosenfeld, ``Does Bank
Supervision Impact Bank Loan Growth? '' Journal of Financial
Stability, Vol. 28, pp. 29-48 (2017).
\14\ Elizabeth K. Kiser, Robin A. Prager, and Jason R. Scott,
``Supervisory Ratings and the Contraction of Bank Lending to Small
Businesses.'' Federal Reserve Board Finance and Economics Discussion
Series (2012).
---------------------------------------------------------------------------

Additionally, the proposed changes would provide clearer
supervisory expectations for financial institutions, potentially
reducing compliance costs and uncertainty while maintaining desired
supervisory outcomes. Institutions devote significant time and effort
to meeting the expectations of supervisors. Ratings function through
three key channels: as a communication tool conveying supervisory
assessments, as a direct risk mitigant through regulatory restrictions,
and as a broad incentive mechanism affecting bank behavior (Bergin &
Stiroh, 2021).\15\ If expectations and guideposts are unclear, a
financial institution's cost of compliance may rise as it attempts to
understand the factors on which ratings will be based. Research
comparing supervisory and market assessments of bank performance
highlights the distinct value that clear supervisory ratings provide to
financial institution management in understanding the true financial
condition of the institution (Berger et al., 1998).\16\ The proposed
framework seeks to provide clearer expectations and stronger signals
around supervisory ratings, which could help lower compliance costs
without reducing the efficacy of the supervisory process.
---------------------------------------------------------------------------

\15\ James Bergin and Kevin Stiroh, ``Why Do Supervisors Rate
Banking Organizations? '' Economic Policy Review, Vol 27(3) (2021).
\16\ Allen N. Berger, Sally M. Davies, and Mark J.
Flannery,''Comparing Market and Supervisory Assessments of Bank
Performance: Who Knows What When? '' (1998), <a href="https://ssrn.com/abstract=121651">https://ssrn.com/abstract=121651</a>.
---------------------------------------------------------------------------

B. Costs to Institutions

Because the proposed framework would shift the focus toward factors
that materially affect an institution's financial condition and risk
profile, there could be potential costs if the shift generates
unintended consequences. For instance, a financial institution's
management may deprioritize certain risk management practices if those
practices are not drivers of CAMELS ratings or perceived to be directly
linked to material financial risk. To the extent that the proposal, if
adopted, delayed the remediation of a risk that subsequently becomes
material to the financial condition of the institution, such
institutions could incur higher costs to deal with the risk and could
also incur losses. Long-term, effective control of material financial
risks requires sustained investment and improvement in risk management
systems.
Although unlikely, revisions to the set of evaluation factors and
ratings definitions may diminish the information content of ratings or
miscalibrate ratings outcomes, potentially putting the financial
condition of institutions at risk of future deterioration, thereby also
potentially increasing the risk of loss to institutions. Although the
agencies expect that the intended reform to the CAMELS rating system
will improve outcomes, research suggests that the current formulation
of supervisory ratings has been more informative about bank failure
than balance sheet metrics alone (Correia et al., 2025) \17\ and thus
contains important information about the financial condition of
depository institutions. However, as previously discussed, the agencies
believe that the proposed changes to the framework will strengthen the
link between ratings and safety and soundness. As such, the agencies
expect the costs discussed above would be modest and believe that the
benefits of the proposed revisions justify the potential costs.
---------------------------------------------------------------------------

\17\ Ricardo Correia, Stephan Luck, and Emil Verner, ``Failing
Banks'' The Quarterly Journal of Economics. Vol. 141(1), pp. 147-204
(2026).
---------------------------------------------------------------------------

V. Regulatory Analysis

In the interest of full and fair participation of the public, and
in order to give the public an opportunity to comment on the proposal,
the FFIEC is publishing this proposed recommendation for notice and
comment.

A. Plain Language

Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies \18\ to use plain language in all proposed and final
rules published after January 1, 2000.\19\ Although this

[[Page 29134]]

proposed recommendation is not a rule, the Federal banking agencies,
under the auspices of the FFIEC, have sought to present the proposed
recommendation in a simple and straightforward manner and invite
comment on the use of plain language. For example:
---------------------------------------------------------------------------

\18\ See 12 U.S.C. 4809(c) (cross-referencing ``Federal banking
agency'' as defined in 12 U.S.C. 1813); 12 U.S.C. 1813 (defining
``Federal banking agency'' as the OCC, the Board, and the FDIC).
\19\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999),
12 U.S.C. 4809.
---------------------------------------------------------------------------

<bullet> Have the Federal banking agencies organized the material
to suit your needs? If not, how could they present the proposed
recommendation more clearly?
<bullet> Are the requirements in the proposed recommendation
clearly stated? If not, how could the proposed recommendation be more
clearly stated?
<bullet> Does the proposed recommendation contain technical
language or jargon that is not clear? If so, which language requires
clarification?
<bullet> Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed recommendation easier
to understand? If so, what changes would achieve that?
<bullet> Would more, but shorter, sections be better? If so, which
sections should be changed?
<bullet> What other changes can the Federal banking agencies
incorporate to make the proposed recommendation easier to understand?

B. Paperwork Reduction Act

In accordance with the Paperwork Reduction Act (PRA),\20\ the
agencies may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid Office of Management and Budget (OMB) control number. This
proposed recommendation would not involve any new, or revise any
existing, collections of information pursuant to the PRA. Consequently,
no information will be submitted to the OMB for review.
---------------------------------------------------------------------------

\20\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities.\21\ This
requirement applies to any rule for which the agency publishes a
general notice of proposed rulemaking pursuant to section 553 of Title
5.\22\ Although the RFA does not apply to this proposed recommendation,
the relevant agencies have undertaken a preliminary analysis. The
agencies do not believe that this proposed recommendation would have a
significant economic impact on a substantial number of small entities.
The proposed recommendation would not impose any obligations on
supervised institutions and would not require supervised institutions
to take any action in response.
---------------------------------------------------------------------------

\21\ See 5 U.S.C. 553, 603, 604 and 605.
\22\ 5 U.S.C. 601
---------------------------------------------------------------------------

D. Unfunded Mandates Reform Act 23
---------------------------------------------------------------------------

\23\ The Unfunded Mandates Reform Act applies to the OCC and is
not applicable to the other FFIEC agencies.
---------------------------------------------------------------------------

The Unfunded Mandates Reform Act of 1995 (UMRA) generally requires
an agency, in connection with any general notice of proposed
rulemaking, to consider whether the proposed rule includes a Federal
mandate that may result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year ($187 million as adjusted annually for
inflation).\24\ Pursuant to section 202 of the UMRA,\25\ if a proposed
rule meets this UMRA threshold, the agency would need to prepare a
written statement that includes, among other things, a cost-benefit
analysis of the proposal. Although the UMRA does not apply to this
proposed recommendation, the OCC has undertaken a preliminary analysis.
This proposed recommendation imposes no new mandates--and thus no
direct costs--on supervised institutions. Accordingly, the proposed
recommendation would not result in an expenditure of $187 million or
more annually by State, local, and tribal governments, or by the
private sector.
---------------------------------------------------------------------------

\24\ 2 U.S.C. 1531 et seq.
\25\ Id. at 1532.
---------------------------------------------------------------------------

E. NCUA Analysis on Executive Order 13132 on Federalism 26
---------------------------------------------------------------------------

\26\ This applies to the NCUA and is not applicable to the other
FFIEC agencies.
---------------------------------------------------------------------------

Executive Order 13132 encourages certain regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an agency as defined in 44 U.S.C. 3502(5), complies with the
executive order to adhere to fundamental federalism principles. This
proposed recommendation would apply to all federally insured credit
unions, including state-chartered credit unions. This scope is set by
statute. The NCUA works cooperatively with state regulatory agencies on
all supervisory matters and will continue to do so. The NCUA expects
that any effect on states or on the distribution of power and
responsibilities among the various levels of government will be minor.
The NCUA welcomes comments on ways to eliminate, or at least minimize,
any potential impact in this area.

F. NCUA Assessment of Federal Regulations and Policies on Families
27
---------------------------------------------------------------------------

\27\ This applies to the NCUA and is not applicable to the other
FFIEC agencies.
---------------------------------------------------------------------------

The NCUA has determined that this proposed recommendation would not
affect family well-being within the meaning of section 654 of the
Treasury and General Government Appropriations Act, 1999. The proposed
recommendation relates to supervision of federally insured credit
unions, and any effect on family well-being is expected to be indirect.

G. Executive Orders 12866 and 14192

Executive Order 12866, as amended, directs agencies to assess the
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits.\28\ This proposed recommendation was drafted and reviewed
in alignment with Executive Order 12866. Within OMB, the Office of
Information and Regulatory Affairs (OIRA) has determined that this
proposed recommendation is a ``significant regulatory action'' under
section 3(f) of Executive Order 12866. Accordingly, the draft proposed
recommendation was submitted to OIRA for review. As noted in other
sections of the SUPPLEMENTARY INFORMATION of this document, the
agencies have assessed the costs and benefits of this proposed
recommendation and have made a reasoned determination that the benefits
of the proposed changes to the UFIRS framework justify the minimal
costs on supervised institutions.
---------------------------------------------------------------------------

\28\ E.O. 12866, 58 FR 51,735 (1993).
---------------------------------------------------------------------------

The proposed recommendation would streamline the UFIRS framework
and clarify the link between CAMELS ratings and safety and soundness by
focusing component and composite ratings on factors that materially
affect a financial institution's financial condition and risk profile.
The agencies have experience in conducting examinations of the safety
and soundness of supervised institutions, and supervised institutions
have an existing mandate to operate in a safe and sound manner.
Executive Order 14192 further requires that new incremental costs
associated with new regulations shall, to the extent permitted by law,
be offset by the elimination of existing costs associated with at least
ten prior regulations. The revisions to the framework, if finalized as
proposed, are not expected to accrue any new

[[Page 29135]]

incremental costs under Executive Order 14192.\29\
---------------------------------------------------------------------------

\29\ E.O. 14192, 90 FR 9065 (2025).
---------------------------------------------------------------------------

Appendix A: Proposed Text of the Uniform Financial Institutions Rating
System

Uniform Financial Institutions Rating System

The Uniform Financial Institutions Rating System (UFIRS) was
adopted by the Federal Financial Institutions Examination Council
(FFIEC) \30\ on November 13, 1979, and updated on December 20,
1996.\31\ Over the years, the UFIRS has generally proven to be an
effective internal supervisory tool for evaluating the soundness of
financial institutions \32\ on a uniform basis and for identifying
those institutions requiring special attention or concern.\33\
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\30\ The agencies represented on the Federal Financial
Institutions Examination Council (FFIEC) are the Board of Governors
of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, the Office of
the Comptroller of the Currency, and the Consumer Financial
Protection Bureau. The chair of the State Liaison Committee serves
as the sixth member of the Council.
\31\ The 1996 revision to UFIRS included the addition of a sixth
component addressing sensitivity to market risks, the explicit
reference to the quality of risk management processes in the
management component, and the identification of risk elements within
the composite and component rating descriptions. The NCUA adopted
the sixth component rating in 2021, which went into effect in 2022.
\32\ For purposes of this rating system, the term ``financial
institution(s)'' refers to those insured depository institutions
whose primary Federal supervisory agency is represented on the
FFIEC, and includes Federally supervised commercial banks, savings
and loan associations, mutual savings banks, and credit unions.
\33\ Because the CFPB does not examine the institutions it
supervises for safety and soundness, the CFPB does not use the
UFIRS.
---------------------------------------------------------------------------

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 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 safety and soundness
related factors that are common to all institutions. Under this system,
the 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 material 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 FFIEC member
entities in fulfilling their collective mission of maintaining
stability and public confidence in the nation's financial system.

Overview

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 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, and, therefore, the highest degree of supervisory concern.
The composite rating generally bears a close relationship to the
component ratings assigned. Each component rating is based on a
rigorous assessment of the evaluation factors comprising that
component. 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 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.
Foreign Branch and specialty review findings and ratings are
considered when assigning composite and component ratings under the
UFIRS to the extent that they impact an institution's overall financial
condition or pose material financial risk.\34\ 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.
---------------------------------------------------------------------------

\34\ Specialty review areas include Compliance (for example,
Consumer Compliance, Bank Secrecy Act/Anti-Money Laundering),
Community Reinvestment, Government Security Dealers, Information
Systems, Municipal Security Dealers, Transfer Agent, and Trust.
---------------------------------------------------------------------------

The following two sections of this document contain the composite
rating definitions, and the descriptions and definitions for the six
component ratings.

Composite Ratings

Composite ratings are based on a careful evaluation of an
institution's financial condition and risk profile with emphasis on
material financial risks. The six key components used to assess an
institution are: Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity, and Sensitivity to Market Risk. 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. These institutions exhibit
strong financial performance. Risk management weaknesses are minor.
These institutions are in substantial compliance with laws and
regulations. As a result, these institutions give no cause for
supervisory concern.
Composite 2
Financial institutions in this group are fundamentally sound and
generally no component rating should be more severe than 3. These
institutions exhibit satisfactory financial performance. Any risk
management weaknesses are moderate and generally do not result in

[[Page 29136]]

material financial risk to the institution. These institutions are in
substantial compliance with laws and regulations. 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 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. 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 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 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 the highest degree of
supervisory concern. These institutions exhibit critically deficient
financial performance. Immediate outside financial or other assistance
is needed for the institution to be viable. Ongoing supervisory
attention is necessary. Institutions in this group pose a significant
risk of loss to the Deposit Insurance Fund or Share Insurance Fund, and
failure is highly probable.

Component Ratings

Each of the component rating descriptions is divided into three
sections: an introductory paragraph; a list of the evaluation factors
that relate to that component; and a description of each numerical
rating for that component. 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 evaluation factors for each
component rating are in no particular order of importance.

Capital Adequacy

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 is expected to
maintain capital commensurate with the nature and extent of risks to
the institution. The types and quantity of risk in an institution's
activities determine whether it may be appropriate to maintain capital
at levels above required regulatory minimums to appropriately support
on- and off-balance sheet exposures. Capital Adequacy is rated based on
an assessment of the following evaluation factors:
<bullet> The level and quality of capital and the institution's
overall financial condition.
<bullet> The institution's effectiveness in maintaining capital
levels commensurate with its risk profile and strategic priorities
through a range of economic conditions.
<bullet> The nature, trend, and volume of problem assets, and the
adequacy of allowances for credit losses and other asset valuation
allowances.
<bullet> Balance sheet composition, including the nature and amount
of intangible assets, market risks, credit risks, concentration risks,
and risks associated with other material activities.
<bullet> Risks posed by off-balance sheet activities and contingent
liabilities.
<bullet> The quality and strength of earnings, and the
reasonableness of capital distributions relative to the institution's
financial condition and material financial risks.
<bullet> Access to other sources of capital, including capital
markets and support provided by a sponsor, parent, or holding company.
Ratings
1. A rating of 1 indicates a strong capital level relative to the
institution's risk profile.
2. A rating of 2 indicates a satisfactory capital level relative to
the institution's risk profile.
3. A rating of 3 indicates a less than satisfactory level of
capital that does not fully support the institution's risk profile. The
rating indicates a need for improvement, even if the institution's
capital level exceeds minimum regulatory requirements.
4. A rating of 4 indicates a deficient level of capital. Viability
of the institution may be threatened, but failure does not appear
imminent. Assistance from shareholders or other external sources of
financial support may be required.
5. A rating of 5 indicates a critically deficient level of capital
such that the institution's viability is threatened. Immediate
assistance from shareholders or other external sources of financial
support is required.

Asset Quality

The Asset Quality rating reflects the quantity of existing and
potential credit risks associated with a financial institution's loan
and investment portfolios, foreclosed or repossessed assets, and other
assets, as well as off-balance sheet exposures. The evaluation of asset
quality includes the adequacy of allowances for credit losses and the
exposure to obligor, issuer, borrower, or other counterparty defaults.
Asset Quality is rated based on an assessment of the following
evaluation factors:
<bullet> The effectiveness of credit underwriting and
administration practices.
<bullet> The level, distribution, severity, and trend of problem,
adversely classified, nonaccrual, restructured, modified, delinquent,
and nonperforming assets for on- and off-balance sheet transactions.
<bullet> The adequacy of allowances for credit losses and other
asset valuation allowances.
<bullet> The credit risk arising from or reduced by off-balance
sheet transactions, such as unfunded commitments, unused lines of
credit, and credit derivatives.
<bullet> The diversification and quality of the loan and investment
portfolios.
<bullet> The financial risk arising from asset concentrations.
<bullet> The extent of securities underwriting activities and
exposure to counterparties in trading activities.
<bullet> The adequacy of loan and investment policies and
practices.
<bullet> The effectiveness of risk monitoring practices and timely
collection of problem assets.

[[Page 29137]]

Ratings
1. A rating of 1 indicates strong asset quality and effective
credit underwriting and administration practices. Any weaknesses are
minor in nature and risk exposure is modest in relation to allowances
for credit losses and capital protection. Asset quality in such
institutions is of minimal supervisory concern.
2. A rating of 2 indicates satisfactory asset quality and adequate
credit underwriting and administration practices. The level and
severity of problem or adversely classified assets and any other
weaknesses warrant a limited level of supervisory attention. Risk
exposure is commensurate with allowances for credit losses and capital
protection.
3. A rating of 3 indicates less than satisfactory asset quality or
inadequate credit underwriting or administration practices. Trends may
be stable or indicate deterioration in asset quality or an increase in
risk exposure. The level and severity of problem or adversely
classified assets, other weaknesses, and risks require an elevated
level of supervisory attention.
4. A rating of 4 indicates deficient asset quality or credit
underwriting or administration practices. The levels of risk and
problem or adversely classified assets are significant, inadequately
controlled, and subject the institution to potential losses that may
threaten its viability.
5. A rating of 5 indicates critically deficient asset quality that
presents an imminent threat to the institution's viability.

Management

The 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. 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. Management is
rated based on an assessment of the following evaluation factors:
<bullet> The level and quality of oversight by the board of
directors and management.
<bullet> The effectiveness of the board of directors and
management, in their respective roles, to plan for and respond to risks
that may arise from changing business conditions or the initiation of
new activities or products.
<bullet> The effectiveness of controls addressing the operations
and risks of significant activities.
<bullet> The accuracy, timeliness, and effectiveness of management
information and risk monitoring systems.
<bullet> The adequacy of audits, internal controls, and
recordkeeping to promote effective operations and reliable financial
and regulatory reporting, safeguard assets, and ensure compliance with
laws and regulations.
<bullet> Compliance with laws and regulations.
<bullet> The extent that directors and management are affected by,
or susceptible to, dominant influence or concentration of authority.
<bullet> Avoidance of excessive compensation, self-dealing, and
conflicts of interest.
Ratings
1. A rating of 1 indicates strong risk management practices
relative to the institution's size, complexity, and risk profile. All
material financial risks are consistently and effectively identified,
measured, monitored, and controlled.
2. A rating of 2 indicates satisfactory risk management practices
relative to the institution's size, complexity, and risk profile. In
general, material financial risks are adequately identified, measured,
monitored, and controlled. Minor weaknesses may exist but are not
material.
3. 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. 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. 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.

Earnings

The Earnings rating reflects the quality, quantity, and trend of a
financial institution's earnings. Earnings can be adversely affected by
excessive or inadequately managed credit risk, which may result in loan
losses and require additions to allowances for credit losses. Earnings
can also be adversely affected by excessive market risk, which may
unduly expose an institution's earnings to volatility in interest
rates. The quality of earnings may be diminished by undue reliance on
extraordinary gains, nonrecurring events, or favorable tax effects. In
addition, future earnings can be adversely affected by high current or
future funding and operating expenses relative to revenues, poorly
executed business strategies, or other poorly managed risks. Earnings
are rated based on an assessment of the following evaluation factors:
<bullet> The level of earnings, including trends and stability.
<bullet> The ability to provide for adequate capital through
retained earnings.
<bullet> The quality and sources of earnings.
<bullet> The level of funding costs and noninterest expenses
relative to the institution's business model.
<bullet> The effectiveness of budgeting and income and expense
forecasting.
<bullet> The adequacy of provisions to maintain allowances for
credit losses and other asset valuation allowances.
<bullet> The earnings exposure to market risk such as interest
rate, foreign exchange, commodity price, or other financial instrument
price risks.
Ratings
1. A rating of 1 indicates strong earnings. Earnings are more than
sufficient to support operations and maintain adequate capital and
allowances for credit losses considering asset quality, growth, and
other factors affecting the quality, quantity, and trend of earnings.
2. A rating of 2 indicates satisfactory earnings. Earnings are
sufficient to support operations and maintain adequate capital and
allowances for credit losses considering asset quality, growth, and
other factors affecting the quality, quantity, and trend of earnings.
Earnings that are relatively static, or experiencing a decline, may
still receive a 2 rating.
3. A rating of 3 indicates less than satisfactory earnings.
Earnings may not fully support operations or provide for the accretion
of capital and allowances

[[Page 29138]]

for credit losses in relation to the institution's overall condition,
growth, and other factors affecting the quality, quantity, and trend of
earnings.
4. A rating of 4 indicates deficient earnings. Earnings are
insufficient to support operations and maintain appropriate capital and
allowances for credit losses. Institutions so rated may be
characterized by erratic fluctuations in net income or net interest
margin, the development of significant negative trends, nominal or
unsustainable earnings, intermittent losses, or a substantive drop in
earnings from prior years.
5. A rating of 5 indicates critically deficient earnings. A
financial institution with earnings rated 5 is experiencing losses that
represent a distinct threat to its viability through the erosion of
capital.

Liquidity

The Liquidity rating reflects the current level and prospective
sources of liquidity compared to funding needs. 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 institution's ability to
manage unplanned changes in funding sources, as well as react to
changes in market conditions that affect the institution's ability to
quickly liquidate assets with minimal loss. Liquidity should also be
maintained at a reasonable cost and without undue reliance on funding
sources that may not be available in the event of financial stress or
adverse 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. Liquidity is rated based on an assessment of
the following evaluation factors:
<bullet> The adequacy of liquidity sources compared to present and
future needs, and the institution's ability to meet liquidity needs
through a range of economic conditions without adversely affecting its
operations or financial condition.
<bullet> The availability of assets that are readily convertible to
cash without undue loss.
<bullet> Access to reliable external or contingent funding sources,
particularly to address potential liquidity shortfalls.
<bullet> The level of funding diversification or funding
concentrations, both on- and off-balance sheet.
<bullet> The degree of reliance on short-term or less stable
funding sources to fund longer-term assets.
<bullet> The trend and stability of deposits.\35\
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\35\ Deposits include credit union share accounts, if
applicable.
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<bullet> The ability to pledge, sell, or securitize assets.
<bullet> The effectiveness of funds management practices, including
contingency funding plans and cash flow forecasting.
Ratings
1. A rating of 1 indicates strong liquidity levels and effective
funds management practices. The institution has reliable access to
sufficient sources of funds on favorable terms to meet present,
anticipated, and contingent liquidity needs. Any identified weaknesses
in funds management practices are minor in nature.
2. A rating of 2 indicates satisfactory liquidity levels and
adequate funds management practices. The institution has access to
sufficient sources of funds on reasonable terms to meet present,
anticipated, and contingent liquidity needs. Modest weaknesses may be
evident in funds management practices.
3. A rating of 3 indicates less than satisfactory liquidity levels
or inadequate funds management practices. Institutions rated 3 may lack
ready access to funds on reasonable terms to meet present, anticipated,
or contingent liquidity needs, or may evidence significant weaknesses
in funds management practices.
4. A rating of 4 indicates deficient liquidity levels or funds
management practices. Institutions rated 4 may not have or be able to
obtain a sufficient volume of funds on reasonable terms to meet
liquidity needs.
5. A rating of 5 indicates critically deficient liquidity levels
that threaten the continued viability of the institution. Institutions
rated 5 require immediate external financial assistance to meet
maturing obligations or other liquidity needs.

Sensitivity to Market Risk

The Sensitivity to Market Risk rating reflects the degree to which
changes in interest rates, foreign exchange rates, commodity prices, or
other financial instrument prices can adversely affect a financial
institution's earnings or 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. For many
institutions, the primary source of market risk arises from nontrading
positions and their sensitivity to changes in interest rates. Foreign
operations and trading activities can also be a significant source of
market risk in some institutions. Sensitivity to Market Risk is rated
based on an assessment of the following evaluation factors:
<bullet> The sensitivity of the institution's earnings or capital
to adverse changes in interest rates, foreign exchange rates, commodity
prices, or other financial instrument prices.
<bullet> 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.
<bullet> Measures of the long-term sensitivity of exposure to
interest rate volatility on the institution's net economic value.
<bullet> The adequacy of market risk measurement and control
practices given the institution's scale and activities.
<bullet> The degree to which assets, liabilities, and off-balance
sheet exposures are appropriately aligned considering their potential
impact on earnings and capital, as well as other risk mitigation
strategies, such as hedging.
<bullet> The effectiveness of managing embedded options risk in
assets and liabilities.
<bullet> The nature and complexity of interest rate risk exposure
arising from nontrading positions.
<bullet> The nature and complexity of market risk exposure arising
from foreign operations and trading activities.
Ratings
1. A rating of 1 indicates that sensitivity to market risk is well
controlled, and market risk management practices are effective. There
is minimal potential that the earnings performance or capital position
will be adversely affected by market risk.
2. A rating of 2 indicates that sensitivity to market risk is
satisfactorily controlled, and market risk management practices are
adequate. There is only moderate potential that the earnings
performance or capital position will be adversely affected by market
risk.
3. A rating of 3 indicates that control of market risk sensitivity
is less than satisfactory or market risk management practices are
inadequate. There is an elevated potential that the earnings
performance or capital position will be adversely affected by market
risk.
4. A rating of 4 indicates that control of market risk sensitivity
or market risk

[[Page 29139]]

management practices is deficient. There is high potential that the
earnings performance or capital position will be adversely affected by
market risk.
5. A rating of 5 indicates that control of market risk sensitivity
is critically deficient and the level of market risk taken by the
institution is an imminent threat to its viability.

Dated at Washington, DC, this 14 day of May 2026.

Federal Financial Institutions Examination Council.
Amol B. Vaidya,
Executive Secretary.
[FR Doc. 2026-09944 Filed 5-18-26; 8:45 am]
BILLING CODE 7535-01-6714-01-6210-01-4810-33-4810-AM;P

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