CAMELS Rating System: What Each Component Measures
Every FDIC-insured bank receives a CAMELS rating after examination. This composite score from 1 to 5 affects regulatory oversight, deposit insurance premiums, and growth strategy.
Every FDIC-insured bank in the United States receives a CAMELS rating following its safety and soundness examination. The rating is a composite score from 1 (strongest) to 5 (weakest). It is one of the most consequential assessments any bank will face. It directly affects:
- regulatory oversight intensity;
- deposit insurance premiums;
- the institution’s ability to pursue growth strategies like acquisitions, branching, and new products.
Federally insured credit unions are rated on the same six components by the NCUA, which added the S (sensitivity to market risk) to its former CAMEL system in 2022. Ratings are confidential supervisory information, so no bank’s or credit union’s actual CAMELS rating is public.
Yet many board members, newer compliance professionals, and even some executives lack a clear picture of how the rating works. This guide explains how the system works, what examiners focus on, and what drives each component score.
What Is the CAMELS Rating System?
CAMELS is an acronym for six components of bank safety and soundness. Federal and state examiners evaluate them during every examination cycle under the interagency rating framework maintained by the FFIEC:
- C: Capital Adequacy. Does the bank have enough capital to absorb losses and support operations?
- A: Asset Quality. How sound is the bank’s loan portfolio and investment holdings?
- M: Management. How competent is the bank’s leadership and governance structure?
- E: Earnings. Is the bank generating sufficient, sustainable earnings?
- L: Liquidity. Can the bank meet its obligations without undue stress?
- S: Sensitivity to Market Risk. How exposed is the bank to changes in interest rates, foreign exchange, and other market variables?
Each component receives an individual rating from 1 to 5. The examiner then assigns a composite rating that reflects the condition of the institution.
The composite is not a simple average. Examiners use professional judgment, weighing the relative significance of each component based on the bank’s specific circumstances.
The framework is under review. On May 19, 2026 the FFIEC agencies published a proposal to revise the Uniform Financial Institutions Rating System (Federal Register document 2026-09944). It would focus ratings on material financial risk, drop the special weight the Management component carries in the composite, and remove references to reputation risk. The comment period closed on August 17, 2026, and nothing changes until the agencies adopt a final version.
The Rating Scale
The scale runs from Composite 1 (sound in every respect) to Composite 5 (critically deficient). Most healthy community banks sit at Composite 2.
Composite 1: Sound in every respect. Strong performance, excellent risk management, minimal supervisory concern. These institutions are resilient to external economic and financial disturbances. Composite 1 ratings are relatively rare and signal truly exceptional performance.
Composite 2: Fundamentally sound. Minor weaknesses may exist but are well within the board’s and management’s capability to correct. Stable and able to withstand business fluctuations. Most healthy community banks operate at Composite 2.
Composite 3: Some degree of supervisory concern in one or more areas. Financial, operational, or compliance weaknesses require more than ordinary supervision. A downgrade to Composite 3 triggers heightened supervision, additional reporting requirements, and often restrictions on growth and dividends.
Composite 4: Serious financial or managerial deficiencies that require close supervisory attention. Financial problems may impair future viability if not adequately addressed. Failure is a possibility but not yet imminent.
Composite 5: Critically deficient. Extremely high probability of failure. Immediate corrective action is required.
Component ratings and the composite
Examiners score each of the six components on the same 1 to 5 scale before they assign the composite.
The composite is not an average of the component ratings: examiners weigh them by the bank’s own risk exposure, and the management component can pull the composite down on its own when the board and senior managers cannot control the risks the other components describe.
Ratings are confidential supervisory information, so the public sees them only indirectly. The usual window is the material loss review written after a bank fails. Those reviews routinely trace a bank’s decline through several years of falling component ratings.
A Closer Look at Each CAMELS Component
C: Capital Adequacy
Examiners assess whether the bank’s capital levels are sufficient to support its risk profile and growth plans. This goes beyond simply checking regulatory minimums.
Key metrics examiners review:
| Metric | Well-Capitalized Minimum | Typical Strong Community Bank |
|---|---|---|
| CET1 Ratio | 6.5% | 10%–14% |
| Tier 1 Leverage Ratio | 5.0% | 8%–12% |
| Total Risk-Based Capital Ratio | 10.0% | 12%–18% |
What drives a strong rating:
- capital well above minimums and peer averages;
- a credible capital plan that accounts for stress scenarios;
- conservative dividend policies relative to earnings;
- growing retained earnings over time.
What triggers concern:
- capital ratios declining toward minimums;
- high dividend payouts consuming most of net income;
- rapid asset growth outpacing capital accumulation;
- insufficient capital planning for adverse scenarios.
A: Asset Quality
Asset quality is often the component that drives the most examiner attention, because credit losses are the primary cause of bank failures.
Key metrics examiners review:
- classified asset ratios (Substandard, Doubtful, Loss relative to capital);
- nonperforming asset ratio;
- net charge-off trends;
- loan concentration levels (especially commercial real estate);
- allowance adequacy under CECL;
- underwriting standards documentation.
What drives a strong rating:
- low and stable classified assets;
- conservative underwriting standards with documentation to prove it;
- a well-diversified loan portfolio;
- CRE concentrations below the interagency guidance screens (construction and land development under 100% of total risk-based capital, and total CRE under 300% or not growing 50% or more over 36 months);
- an adequate allowance supported by a well-documented methodology.
What triggers concern:
- classified assets above 40% of Tier 1 capital plus allowance;
- rising nonperforming asset trends;
- CRE concentration that meets the 2006 guidance screens (total CRE at or above 300% of total risk-based capital with 50% growth over 36 months, or construction at or above 100%) without commensurate risk management;
- weak underwriting standards;
- an allowance that appears insufficient relative to portfolio risk.
M: Management
This is the most qualitative component and often the most subjective. Examiners assess the quality of the board and management team, governance practices, strategic planning, risk management frameworks, and compliance culture.
What drives a strong rating:
- an engaged, knowledgeable board with relevant expertise;
- a management team that proactively identifies and addresses risks;
- well-documented policies and procedures that are actually followed;
- a strong compliance management system;
- an effective internal audit function;
- a clear strategic plan with measurable goals and regular progress reviews.
What triggers concern:
- board members who are disengaged or lack banking knowledge;
- management that is reactive rather than proactive;
- high management turnover;
- significant audit or examination findings that recur across examination cycles;
- weak internal controls;
- inadequate succession planning.
E: Earnings
Examiners evaluate whether the bank’s earnings are sufficient, sustainable, and properly measured. One-time gains do not count; they are looking at core earning power.
Key metrics examiners review:
| Metric | Strong | Adequate | Weak |
|---|---|---|---|
| ROAA | > 1.0% | 0.50%–1.0% | < 0.50% |
| Efficiency Ratio | < 65% | 65%–80% | > 80% |
| NIM Trend | Stable/Improving | Stable | Declining 3+ qtrs |
What drives a strong rating:
- ROAA consistently at or above 1.0%;
- stable or improving NIM;
- efficiency ratio below 65%;
- diversified revenue sources;
- earnings that support capital growth and strategic investment.
What triggers concern:
- ROAA below 0.50% for multiple quarters;
- dependence on securities gains or other one-time items;
- NIM compression outpacing peers;
- efficiency ratio above 80%;
- inability to retain earnings due to high dividend payments.
L: Liquidity
Liquidity management has received heightened attention since the bank stress events of 2023. Examiners assess whether the bank can meet its obligations under both normal and stressed conditions.
Key metrics examiners review:
- net non-core funding dependence;
- loan-to-deposit ratio;
- pledged securities ratio;
- unused borrowing capacity;
- cash flow projections;
- deposit concentration and stability;
- contingency funding plans.
What drives a strong rating:
- a core deposit-funded balance sheet;
- diversified funding sources;
- strong unused borrowing capacity;
- a documented and tested contingency funding plan;
- low deposit concentration risk;
- manageable unrealized securities losses.
What triggers concern:
- high non-core funding dependence (above 30%);
- a concentrated deposit base with large uninsured deposits from few sources;
- significant unrealized securities losses limiting liquidity options;
- no tested contingency funding plan;
- rapid deposit outflows.
S: Sensitivity to Market Risk
This component assesses the bank’s exposure to changes in interest rates, and for some banks, foreign exchange and other market risks.
What drives a strong rating:
- a strong asset-liability management (ALM) framework with regular stress testing;
- interest rate risk within board-approved limits;
- demonstrated ability to manage through rate cycles;
- management that understands and can articulate the bank’s rate risk position.
What triggers concern:
- excessive earnings exposure to rate changes;
- lack of credible stress testing;
- ALM policies that are outdated or not followed;
- positions that suggest speculative rate bets rather than prudent risk management.
CAMELS at Credit Unions: What NCUA Does Differently
Everything above describes bank supervision. Credit unions are graded on CAMELS too, but they got there later and the capital component means something structurally different.
When NCUA adopted CAMELS
NCUA adopted CAMELS effective April 1, 2022, under Letter to Credit Unions 22-CU-05. Before that, federally insured credit unions were examined under CAMEL, the five-component version with no “S”. The 2022 change did two things:
- it added S, Sensitivity to Market Risk, as a standalone component;
- it redefined L as Liquidity Risk, covering a credit union’s ability to monitor and manage liquidity risk and the adequacy of its liquidity levels.
Composite ratings of 3, 4, or 5 are appealable.
The practical consequence is that credit union CAMELS history is short. Anything before April 2022 was scored on a different scale. The “S” component has no pre-2022 baseline to trend against.
Why the C component differs
The C component is not comparable to a bank’s. This is the part that trips up analysts who move between the two.
A credit union cannot issue stock, so it cannot raise capital the way a bank does. Its capital comes almost entirely from retained earnings; the main exception is subordinated debt, which low-income-designated credit unions may count toward net worth. That makes the net worth ratio (net worth divided by total assets) the core solvency measure. It is also the trigger for NCUA prompt corrective action, filling the role the leverage ratio plays at a bank.
Since January 1, 2022, complex credit unions (over $500 million in assets) also carry NCUA’s risk-based capital ratio, or may elect the complex credit union leverage ratio (CCULR) instead. Even so, a credit union has no CET1 ratio, no Tier 1 risk-based ratio, and no Total Capital ratio as banks define them.
So when you benchmark capital adequacy across the two charters, you are not comparing like with like:
| Bank | Credit union | |
|---|---|---|
| Primary regulator | FDIC, OCC, or Federal Reserve | NCUA |
| Rating system since | CAMELS (long established) | CAMELS from April 1, 2022; CAMEL before |
| Capital measure behind “C” | CET1, Tier 1, Total Capital, leverage | Net worth ratio (plus risk-based capital or CCULR for complex credit unions) |
| Can raise outside capital | Yes | Mostly retained earnings; low-income credit unions may issue subordinated debt |
| Source filing | Call Report (FFIEC 031/041/051) | NCUA Form 5300 |
The last row is the one that quietly breaks peer analysis. The 5300 is a different form with different line items. A screener that computes a bank ratio from call report codes will not produce the same number for a credit union, even when the ratio shares a name. Compare credit unions to credit unions.
You can browse every federally insured credit union and track the same components NCUA examiners score.
How to Prepare for Your Bank’s CAMELS Rating
Preparation should be ongoing, not something that begins when you receive the examination notification letter.
Monitor your own CAMELS drivers quarterly. Use your UBPR data to track the same metrics examiners will review. BankRegReports makes this easy with automated trend tracking and peer percentile rankings across all CAMELS-relevant metrics.
Maintain current policies and documentation. Examiners review whether policies exist, whether they are current, and whether they are actually followed. Ensure all policies have been reviewed and approved by the board within the required timeframes.
Address prior examination findings. Nothing frustrates examiners more than seeing the same findings repeat. Document what you did to address every prior finding and prepare a summary for the examination team.
Prepare a management self-assessment. Some institutions prepare a written overview of their condition, key risks, and recent developments for the examination team. This demonstrates proactive risk awareness and can set a positive tone.
How BankRegReports Supports CAMELS Preparation
BankRegReports provides the data foundation for every CAMELS component, all in one platform with data going back to 2001. You can:
- track your capital ratios against peers;
- monitor asset quality trends;
- benchmark earnings and efficiency;
- assess liquidity positioning;
- identify areas where your metrics are diverging from peers.
Frequently Asked Questions
What is a CAMELS rating? CAMELS is a supervisory rating system used by federal and state banking regulators to evaluate the condition of a bank. The acronym stands for Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Each component is rated 1–5, and a composite rating is assigned.
Are CAMELS ratings public? No. Individual bank CAMELS ratings are confidential supervisory information. They are not disclosed to the public. Public call report data can support an independent scorecard under the same six headings, but that is a separate assessment, not an estimate of the official rating, which also reflects examination findings that are never published.
What is a good CAMELS rating? A composite rating of 1 or 2 indicates a bank that is fundamentally sound. Most healthy community banks receive a Composite 2 rating. A Composite 1 is rare and signals exceptional performance across all categories.
How often are CAMELS ratings assigned? CAMELS ratings are assigned during each safety and soundness examination. For well-rated banks, examinations typically occur every 12–18 months. Banks with lower ratings may be examined more frequently.
What happens if a bank receives a CAMELS downgrade? A downgrade, particularly to Composite 3 or lower, triggers increased supervisory oversight, potentially higher FDIC insurance premiums, restrictions on growth activities, and may require the bank to develop and implement a corrective action plan.
Can a bank improve its CAMELS rating? Yes. Banks can improve their CAMELS rating by addressing the specific weaknesses identified in their examination report. Improvements in financial performance, risk management practices, and governance can lead to upgrades at subsequent examinations.
Do credit unions get CAMELS ratings? Yes. NCUA adopted CAMELS for federally insured credit unions effective April 1, 2022, under Letter to Credit Unions 22-CU-05, replacing the older five-component CAMEL system.
The change added Sensitivity to Market Risk as a standalone component and redefined Liquidity as Liquidity Risk. The capital component is graded on the net worth ratio rather than the CET1, Tier 1, and leverage ratios used at banks, because a credit union cannot issue stock and builds capital almost entirely through retained earnings.