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Appeal of CAMELS Component Ratings and Termination of an Informal Enforcement Action (Fourth Quarter 2011)


A federal thrift appealed the component ratings for capital and liquidity assigned at the most recent examination.  The bank also requested termination or amendment of its existing Memorandum of Understanding (MOU).


Thrift management filed an appeal stating the 2 ratings assigned for both capital and liquidity were not in accordance with the definitions contained in the Uniform Financial Institution Rating System (UFIRS). Management felt that capital and liquidity both warranted a 1 rating in accordance with the UFIRS definitions.

Capital – The appeal stated the thrift’s capital was of the highest quality, consisting of common equity and retained earnings.  Their stress tests demonstrated that capital ratios would exceed the well-capitalized levels even if all substandard assets were charged off.

Liquidity – The appeal stated a 1 rating should be assigned liquidity because the thrift had "strong" versus "satisfactory" liquidity levels, using the UFIRS rating definitions.  The thrift would achieve their target liquidity ratios under four stress test scenarios; indicating ample liquidity under every reasonable scenario.  The bank had complied with the Matters Requiring Attention cited in the previous Report of Examination (ROE) which called for a more detailed Liquidity Policy and enhancements to ensure proper measuring, monitoring, and managing of liquidity in accordance with the wishes of the Board.  

MOU – The appeal requested the MOU be terminated because management had complied with every term of the MOU, while the examination cited that management still had open items related to fair lending and Information Technology (IT) programs.

Management revised and implemented the fair lending program as directed; however, the examination noted weaknesses in the program which indicated the requirements of the MOU were not met.  Management believed that the weaknesses noted were "regulatory guidance" and too vague in nature to set the standard for MOU compliance.  

With regard to the IT issues, management made significant progress to address the provisions of the MOU as noted in the ROE; however the requirement for annual monitoring of the Business Continuity and Information Security programs remained open.  Management agreed that these programs are ongoing and must be tested and updated regularly as risks and business practices change; however, the fact that the MOU items are considered open in anticipation of the ongoing monitoring was an "unwarranted interpretation" of the MOU.


The ombudsman reviewed the information submitted by the bank and the supervisory office.  The UFIRS as defined in the Comptroller’s Bank Supervision Process Handbook was used as the standard for determining the appropriate composite ratings for capital and liquidity.  

With regards to the request for an upgrade of the capital rating from "2" to "1", the ombudsman found the thrift’s capital position was consistent with a capital rating of "2".  When rating capital, consideration was given to the bank’s overall risk profile, ability to support operations, and adverse conditions that may impact the quality of capital.  Asset quality was less than satisfactory and rated "3" because of the elevated levels of loan classifications, delinquencies, losses, and weaknesses in Troubled Debt Restructurings.  The level of classified assets represents an adverse impact on the quality of capital.  A rating of 2 was appropriate as it indicates satisfactory levels of capital after consideration of elevated credit risks.  

With respect to the requested upgrade in liquidity from 2 to 1, the ombudsman found the bank’s liquidity position was consistent with a 2 rating.  The bank’s liquidity levels were adequate to meet present and future needs with little reliance on borrowing sources; however, the liquidity rating also considered the less than satisfactory asset quality position and its impact to the cost of funds from secondary liquidity sources.  In addition, liquidity risk management tools were not fully developed.  Risk management tools must be reflective of the bank’s current environment and commensurate with the complexity of operations in order to properly measure, monitor, and control liquidity needs.

Regarding the request for amendment or termination of the MOU, the ombudsman concluded that continuation of the MOU was reasonable.  The MOU is a voluntary and informal agreement between the bank and the Supervisory Office  As such, termination of the agreement should occur when both parties are assured the spirit and the intent of the MOU have been met; this includes the sustainability of the actions taken in compliance with the agreement.