We Need to Keep the CAMEL in the Tent

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.