TO:
|
CHIEF EXECUTIVE OFFICER
|
SUBJECT:
|
Common Questions and
Answers on the
Revised Uniform Financial Institutions Rating System
|
Attached is additional guidance on the revised Uniform Financial
Institutions Rating System (UFIRS) or "CAMELS" rating system that was
issued recently by the Task Force on Supervision of the Federal
Financial Institutions Examination Council.
The question and answer document was developed on an
interagency basis
and coordinated with the Conference of State Bank
Supervisors. The
document explains and clarifies the revised UFIRS, and is
being
distributed to bankers and examiners to help ensure uniform
implementation of the revised rating system.
The majority of the questions address the new "S"
component, called
"Sensitivity to Market Risk." For most
institutions without active
foreign exchange or trading operations, market
risk primarily reflects
exposure to changes in interest rates. The FDIC
issued new interest
rate risk examination procedures last fall that
guide examiners toward
a qualitative assessment of an institution's
interest rate risk
management and exposure. These examination
procedures are designed to
focus examiner resources on areas requiring
additional attention,
thereby reducing the burden on institutions.
Additional copies of the Q&A document
can be obtained from the FDIC's
home page at www.fdic.gov/banknews/fils.
If you have any questions
about the attachment or the revised
CAMELS rating system, please
contact your Division of Supervision
Regional Office or Daniel M.
Gautsch, Examination Specialist, at
(202) 898-6912. Specific
questions on the new "S" component can
be directed to John Feid,
Chief, Risk Management Unit, Office of
Capital Markets, at (202) 898-8649.
|
Nicholas
J. Ketcha Jr.
|
|
Director
|
Attachment
(below)
Distribution:
FDIC-Supervised
Banks
(Commercial and
Savings)
NOTE:
Paper
copies
of
FDIC
financial
institution
letters
may
be
obtained
through
the
FDIC's
Public
Information
Center,
801
17th
Street,
N.W.,
Room
100,
Washington,
D.C.
20434
((703)
562-2200
or
800-276-6003).
Attachment:
---------------------------------------------------------------
OFFICE
OF
THE
COMPTROLLER
OF
THE
CURRENCY
OFFICE
OF
THRIFT
SUPERVISION
BOARD
OF
GOVERNORS
OF
THE
FEDERAL
RESERVE
SYSTEM
FEDERAL
DEPOSIT
INSURANCE
CORPORATION
----------------------------------------------------------------
March
4,
1997
JOINT
INTERAGENCY
COMMON
QUESTIONS
AND
ANSWERS
ON
THE
REVISED
UNIFORM
FINANCIAL
INSTITUTIONS
RATING
SYSTEM
On
March
4,
1997,
the
Task
Force
on
Supervision
of
the
Federal
Financial
Institutions
Examination
Council
approved
the
issuance
of
common
questions
and
answers
about
the
recently
revised
Uniform
Financial
Institutions
Rating
System.
The
Office
of
the
Comptroller
of
the
Currency
(OCC),
the
Office
of
Thrift
Supervision
(OTS),
the
Federal
Reserve
Board
(FRB),
and
the
Federal
Deposit
Insurance
Corporation
(FDIC)
collectively
developed
common
responses
to
questions
asked
to
date
by
bankers
and
examiners
regarding
the
revised
rating
system.
The
responses
were
coordinated
with
the
Conference
of
State
Bank
Supervisors.
The
purpose
of
the
questions
and
answers
is
to
provide
additional
interagency
guidance
and
clarification
regarding
the
revised
rating
system.
On
December
9,
1996,
the
Federal
Financial
Institutions
Examination
Council
(FFIEC)
adopted
the
revised
Uniform
Financial
Institutions
Rating
System
(UFIRS
or
CAMELS
rating
system).
The
UFIRS
is
an
internal
rating
system
used
by
the
federal
and
state
regulators
for
assessing
the
soundness
of
financial
institutions
on
a
uniform
basis
and
for
identifying
those
insured
institutions
requiring
special
supervisory
attention.
A
final
notice
was
published
in
the
Federal
Register
on
December
19,
1996
(61
FR
67021),
effective
January
1,
1997.
The
major
changes
to
UFIRS
include
an
increased
emphasis
on
the
quality
of
risk
management
practices
and
the
addition
of
a
sixth
component
called
"Sensitivity
to
Market
Risk."
The
updated
rating
system
also
reformats
and
clarifies
component
rating
descriptions
and
component
rating
definitions,
revises
composite
rating
definitions
to
parallel
the
other
changes
in
the
rating
system,
and
highlights
risks
that
may
be
considered
in
assigning
component
ratings.
The
attached
questions
and
answers
are
being
distributed
to
bankers
and
examiners
to
ensure
consistent
and
uniform
implementation
of
the
revised
rating
system.
COMMON
QUESTIONS
AND
ANSWERS
ON
THE
REVISED
UNIFORM
FINANCIAL
INSTITUTIONS
RATING
SYSTEM
-
How
will
the
new
Sensitivity
to
Market
Risk
(S)
component
rating
be
determined?
The
rating
assigned
to
the
S
component
should
reflect
a
combined
assessment
of
both
the
level
of
market
risk
and
the
ability
to
manage
market
risk.
Low
market
risk
sensitivity
alone
may
not
be
sufficient
to
achieve
a
favorable
S
rating.
Indeed,
institutions
with
low
risk,
but
inadequate
market
risk
management,
may
be
subject
to
unfavorable
S
ratings.
Conversely,
institutions
with
moderate
levels
of
market
risk
and
the
demonstrated
ability
to
ensure
that
market
risk
is,
and
will
remain,
well
controlled
may
receive
favorable
S
component
ratings.
In
assessing
the
level
of
market
risk
exposure
and
the
risk
management
process
in
place
to
control
it,
examiners
will
rely
on
existing
supervisory
guidance
issued
by
their
respective
agencies,
including
guidance
issued
on
interest
rate
risk,
investment,
financial
derivatives,
and
trading
activities.
-
Will
institutions
be
expected
to
have
formal,
sophisticated
risk
management
processes
in
order
to
receive
the
favorable
ratings
for
S?
In
line
with
the
general
thrust
of
the
agencies'
various
guidance
on
market
risk,
the
sophistication
of
an
institution's
risk
management
system
is
expected
to
be
commensurate
with
the
complexity
of
its
holdings
and
activities
and
appropriate
to
its
specific
needs
and
circumstances.
Institutions
with
relatively
noncomplex
holdings
and
activities,
and
whose
senior
managers
are
actively
involved
in
the
details
of
daily
operations,
may
be
able
to
rely
on
relatively
basic
and
less
formal
risk
management
systems.
If
the
procedures
for
managing
and
controlling
market
risks
are
adequate,
communicated
clearly,
and
well
understood
by
all
relevant
parties,
these
basic
processes
may,
when
combined
with
low
to
moderate
levels
of
exposure,
be
sufficient
to
receive
a
favorable
rating
for
the
S
component.
Organizations
with
more
complex
holdings,
activities
and
business
structures
may
require
more
elaborate
and
formal
market
risk
management
processes
in
order
to
receive
ratings
of
1
or
2
for
the
S
component.
-
How
much
weight
should
be
placed
on
the
S
component
in
determining
the
composite
rating?
The
weight
attributed
to
any
individual
component
in
determining
the
composite
rating
should
vary
depending
on
the
degree
of
supervisory
concern
associated
with
the
component.
The
composite
rating
does
not
assume
a
predetermined
weight
for
each
component
and
it
does
not
represent
an
arithmetic
average
of
assigned
component
ratings.
As
a
result,
for
most
institutions
where
market
risk
is
not
a
significant
issue,
less
weight
should
be
placed
on
the
S
component
in
determining
a
composite
rating
than
on
other
components.
-
How
should
the
S
rating
be
applied
when
evaluating
small
community
banks
or
thrifts
with
limited
asset/liability
management
processes?
For
most
small
community
banks
or
thrifts,
sensitivity
to
market
risk
will
primarily
reflect
interest
rate
risk.
Regardless
of
the
size
of
an
institution,
the
quality
of
risk
management
systems
must
be
commensurate
with
the
nature
and
complexity
of
its
risk-taking
activities,
and
management's
ability
to
identify,
measure,
monitor
and
control
the
risk.
Evaluation
of
this
component
will
be
based
on
the
degree
to
which
interest
rate
risk
exposure
can
affect
the
institution's
earnings
and
capital,
and
the
effectiveness
of
the
institution's
asset/liability
or
interest
rate
risk
management
system,
given
its
particular
situation.
-
If
the
levels
of
market
risk
change
between
examinations,
is
it
always
necessary
to
change
the
rating
assigned
to
the
S
component?
The
rating
assigned
to
the
S
component
should
reflect
a
combined
assessment
of
both
the
level
of
market
risk
and
the
ability
to
manage
market
risk.
Accordingly,
changes
in
either
quantitative
or
qualitative
aspects
of
market
risk
exposure
or
management
may
necessitate
changes
in
the
rating
assigned
to
the
S
component.
While
changes
in
the
level
of
market
risk
between
examinations
may
in
some
circumstances
necessitate
a
change
in
the
rating
assigned
to
the
S
component,
this
does
not
automatically
imply
a
rating
change.
For
example,
an
institution
that
accepts
additional
market
risk
between
examinations,
but
maintains
risk
management
processes
and
earnings
and
capital
levels
commensurate
with
the
level
of
risk,
need
not
have
its
S
rating
changed.
-
Does
the
increased
emphasis
on
market
risk
management
practices
place
new
and
burdensome
requirements
on
institutions
or
examiners?
The
updated
rating
system
incorporates
examination
considerations
that
were
not
explicitly
noted
in
the
prior
rating
system.
Under
the
prior
rating
system,
examiners
considered
market
risk
exposure
and
risk
management
practices
when
assigning
component
and
composite
ratings.
Consequently,
examiners
are
not
required
to
perform
any
additional
procedures,
and
institutions
are
not
required
to
add
to
their
management
procedures
or
practices,
solely
because
of
the
updated
rating
system.
-
Will
the
revised
rating
system,
with
the
addition
of
the
new
Sensitivity
to
Market
Risk
(S)
component
and
increased
emphasis
on
the
quality
of
risk
management
practices,
result
in
a
change
in
a
bank's
or
thrift's
composite
rating?
The
revised
rating
system
generally
should
not
result
in
a
change
in
the
composite
rating
assigned
to
a
particular
bank
or
thrift
simply
because
of
the
addition
of
the
new
component
and
the
increased
emphasis
on
risk
management
practices.
The
level
of
market
risk
has
traditionally
been
taken
into
consideration
when
evaluating
an
institution's
capital,
earnings
and
liquidity.
The
quality
of
an
institution's
risk
management
practices
has
also
traditionally
been
considered
by
examiners
when
assessing
an
institution's
condition
and
assigning
ratings,
particularly
in
the
Management
component.
-
How
much
weight
should
be
given
to
risk
management
practices
versus
the
level
of
exposure,
as
measured
by
specific
ratios,
when
assigning
a
component
rating?
The
CAMELS
rating
system
assesses
an
institution's
overall
condition
based
on
both
quantitative
and
qualitative
elements.
Quantitative
data
such
as
the
level
of
classified
assets
remain
an
integral
part
of
that
measurement.
Qualitative
elements,
such
as
the
adequacy
of
board
and
senior
management
oversight,
policies,
risk
management
practices,
and
management
information
systems
are
also
central
to
the
evaluation
of
components.
The
relative
importance
given
to
the
qualitative
considerations
for
each
component
depends
on
the
circumstances
particular
to
the
institution.
Risk
management
systems
should
be
appropriate
for
the
nature
and
level
of
risks
the
institution
assumes.
However,
unacceptable
risk
levels
or
an
unsatisfactory
financial
condition
will
often
outweigh
other
factors
and
result
in
an
adverse
component
rating.
-
Why
aren't
peer
data
comparisons
specifically
mentioned
in
the
revised
rating
system?
May
they
still
be
used
in
assigning
ratings?
Peer
data
are
an
integral
part
of
the
evaluation
process
and,
when
available
and
relevant,
may
be
used
in
assigning
a
rating.
However,
peer
data
should
be
used
in
conjunction
with
other
pertinent
evaluation
factors
and
not
relied
upon
in
isolation
when
assigning
a
rating.
-
Agency
guidelines
require
examiners
to
discuss
with
senior
management
and,
when
appropriate,
with
the
board
of
Directors
the
evaluation
factors
they
considered
in
assigning
component
ratings
and
a
composite
rating.
Are
examiners
limited
to
only
those
evaluation
factors
listed
in
the
revised
rating
system
and
must
each
evaluation
factor
be
addressed
when
assessing
a
component
area?
No.
Examiners
have
the
flexibility
to
consider
any
other
evaluation
factors
that,
in
their
judgment,
relate
to
the
component
area
under
review.
The
evaluation
factors
listed
under
a
component
area
are
not
intended
to
be
all-inclusive,
but
rather
a
list
of
the
more
common
factors
considered
under
that
component.
Only
those
factors
believed
relevant
to
fully
support
the
rating
being
assigned
by
the
examiner
need
be
addressed
in
the
report
and
in
discussions
with
senior
management.
-
With
multiple
references
to
some
items
across
several
components,
such
as
market
risk
and
management's
ability
to
identify,
measure,
monitor,
and
control
risk,
are
we
"double
counting"
these
and
other
items
when
assigning
a
rating?
Each
component
is
interrelated
with
one
or
more
other
components.
For
example,
the
level
of
problem
assets
in
an
institution
is
a
primary
consideration
in
assigning
an
asset
quality
component
rating.
But
it
is
also
an
item
that
affects
the
capital
and
earnings
component
ratings.
The
level
of
market
risk
and
the
quality
of
risk
management
practices
are
elements
that
also
can
affect
several
components.
Examiners
consider
relevant
factors
and
their
interrelationship
among
components
when
assigning
ratings.
-
To
what
extent
should
market
risk
be
carved
out
of
the
earnings
or
capital
evaluation?
Should
institutions
with
high
market
risk
receive
an
adverse
rating
in
the
earnings
or
capital
components
as
well
as
the
market
sensitivity
component?
Market
risk
is
evaluated
primarily
under
the
new
S
component
and
is
only
one
of
several
evaluation
factors
used
to
assess
the
earnings
and
capital
components.
Whether
the
institution's
exposure
to
market
risk
results
in
an
unfavorable
rating
for
earnings
or
capital,
however,
is
based
on
a
careful
analysis
of
the
effect
of
this
factor
in
relation
to
the
other
factors
considered
under
these
components.
The
capital
component
is
evaluated
based
on
the
risk
profile
of
an
institution,
including
the
effect
of
market
risk,
and
whether
the
level
of
capital
supports
those
risks.
The
earnings
component
evaluates
the
ability
of
earnings
to
support
operations
and
maintain
adequate
capital
after
considering
factors,
such
as
market
risk
exposure,
that
affect
the
quantity,
quality,
and
trend
of
earnings.
The
importance
accorded
to
an
evaluation
factor
should
thus
depend
on
the
situation
at
the
institution.
|