The advocacy for the release of CAMEL ratings continues to be in the news. In my opinion, any disclosure of a CAMEL rating is clearly misguided and runs contrary to the basic underpinnings of our banking system. Our banking system rests on a three legged stool: federal deposit insurance (and its accompanying safety and soundness standards), public confidence in the system and the federal government’s ability to resolve a crisis. Take away any one of them and you have the potential for chaos.
Let’s focus for a moment on what I believe is the most important leg of the stool–public confidence. Just look back a few years ago to the failure of IndyMac Bank (one of many unfortunately) as a recent example. A run on the bank took place after questions were raised about its viability and that in turn accelerated its failure. The bank was FDIC insured, and it is quite likely that many of those depositors that lined up at the branches had deposits well within the insurance limit. That of course did not matter since they lost confidence in the bank. As an attorney who worked on resolving failing institutions for the government in the 1980s and in private practice thereafter, I have witnessed firsthand the importance of confidence in the banking system. It surpasses deposit insurance and the government’s resolution capabilities, particularly in an era of government cynicism.
A composite CAMEL rating is a classification that is given on the judgment of the examination staff, and, although it is based on many objective criteria, there is much discretion afforded to the examination staff in assigning a final rating. For example, an institution may need a bit more improved performance before being upgraded or an institution may need some stern upbraiding and therefore given a lower rating. Now, if the release of CAMEL ratings is to be permissible, then should not it be permissible regardless of the rating? Further, is it really meaningful without reading the entire examination report? Can it be explained in a manner easily understood by the member? I doubt that any credit union executive would agree to have a CAMEL rating of 3 or 4 disclosed. Would you want to read about your institution in a negative light on the first page of the local newspaper or in the business section? Public confidence in a poorly rated institution can evaporate quickly. CAMEL rated 1 or 2 credit unions can grandstand at will and advocate (or even disclose as in one case) disclosure of their examination ratings, but let’s see how quick they are when the shoe is on the other foot. Further, would not those who do not disclose be otherwise tainted by remaining silent? Nondisclosure could certainly be viewed with negative implications. Isn’t that theme why all the major banking institutions had to take TARP whether they needed it or not?
The main argument for disclosure appears to be that since the members are owners of a credit union they should be entitled to that information so that they may effectuate change. But if indeed a credit union member is really an owner of the institution, why stop at the disclosure of CAMEL ratings? Why not disclose, for example, executive compensation like all public companies do so that the members can see the salary, bonus and supplemental retirement plans of management? There is no prohibition to do that now except for the employee’s consent.
To advocate disclosure so change could be effected by the members is not a realistic view of the corporate governance of credit unions. But let’s say for hypothetical purposes the rating is disclosed, what is a member to do with it? The easiest things to do would be to question management or ask the regulator and if that is not satisfactory perhaps pull their money out. Their odds of replacing the board or effecting changes in management are stacked against them.
Frankly, if the member was interested enough they could review the latest 5300 and reach a conclusion about the safety and soundness of the institution or rely on one of the commercial rating services. A 5300 obviously can disclose much about the financial condition of a credit union, but most members don’t really care because they have no financial risk unless they have uninsured deposits.
In today’s competitive and regulatory environment where credit unions and banks butt heads on a number of topics including regulatory relief, advocating the disclosure of CAMEL ratings is a notch on the bankers’ gun barrel that credit unions aren’t sophisticated enough to have additional powers for any banker and all bank regulators know (and thankfully the NCUA) that disclosure of a CAMEL rating is a nonstarter and perhaps downright silly. Why give the banking industry another argument against credit union regulatory relief? I say keep the CAMEL in the tent where he (and she) belongs.
Richard Garabedian is a partner at the law firm of Luse Gorman Pomerenk & Schick, P.C.
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