Are You Ready for Your Next Safety and Soundness Examination?

Are You Ready for Your Next Safety and Soundness Examination?

(Spoiler alert: It Will Require you to Evaluate the Effect of the COVID-19 Pandemic on Your Bank)

Did you know that, in June 2020, the federal financial institution regulatory agencies, in conjunction with the state bank and credit union regulators, jointly issued examiner guidance to outline the supervisory principles for assessing the safety and soundness of institutions given the ongoing impact of the COVID-19 pandemic?

In assessing an institution under the principles in this guidance, examiners will consider the institution’s asset size, complexity, and risk profile, as well as the industry and business focus of its customers.


Regulators are concerned that adverse economic effects of the pandemic will likely have a significant impact on the business activities of institutions and their customers for an extended period. The containment measures adopted in response to public health concerns resulted in restrictions on the physical movement of institutions’ personnel and those of their service providers and customers, which, in turn, have created significant operational challenges. In addition, government programs and policies intended to provide support and assistance to those affected by the pandemic have impacted institutions’ economic and regulatory landscape. The overall impact of, and recovery from, the pandemic could be uneven and highly localized across the country.

Overall Supervisory Assessment

Examiners are required to maintain a clear understanding of the financial condition of each institution and the effectiveness of each institution’s risk assessment and response to the economic changes. To promote consistency and transparency across the agencies, examiners will continue to assign supervisory ratings in accordance with the applicable rating system, including the Uniform Financial Institutions Rating System, commonly referred to as the CAMELS rating.  

Similarly, Federal Reserve examiners will apply the principles outlined in this guidance in assigning supervisory ratings to bank holding companies, U.S. intermediate holding companies, and savings and loan holding companies using the RFI/C(D) rating system or LFI rating system.  In applying the principles in this document, examiners will consider the institution’s asset size, complexity, and risk profile as well as the industry and business focus of its customers.

Examiners should assess the reasonableness of management’s actions in response to the pandemic given the institution’s business strategy and operational capacity in the distressed economic and business environment in which the institution operates. When assessing management, examiners will consider management’s effectiveness in responding to the changes in the institution’s business markets and whether the institution has addressed these issues in its longer-term business strategy.

An examiner’s assessment may result in downgrading component or composite ratings for some institutions. In considering the supervisory response for institutions accorded a lower rating, examiners will give appropriate recognition to the extent to which weaknesses are caused by external economic problems related to the pandemic versus risk management and governance issues. Examiners will also consider the extent to which institutions have taken actions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of the pandemic.

Regulators will consider whether to take a formal or informal enforcement action in response to issues related to the pandemic, the agencies will consider whether an institution’s management has appropriately planned for financial resiliency and continuity of operations; implemented prudent policies; and is pursuing realistic resolution of the issues confronting the institution. In instances where a formal or informal supervisory action is warranted, the agencies will tailor their response to the institution’s specific issues and the willingness and ability of institution management to resolve the issues.

This evaluation will include the following areas:

  • CAMELS or ROCA Component Ratings
    • Capital Adequacy
    • Asset Quality
      • Classification of Credits
      • Credit Risk Review
      • New Loans
      • Paycheck Protection Program 
      • Credit Modifications
      • Nonaccrual
      • Allowance for Loan and Lease Losses (ALLL) or Allowances for Credit Losses (ACLs) 
      • Obligations of Taxing Authorities
      • Real Estate Values
      • Appraisal and Evaluation Delays
    • Management
      • Operational Risk
      • Independent Risk Management and Audit
    • Earnings
    • Liquidity
    • Sensitivity to Market Risk

For more information, you can obtain this guidance here.

This guidance is short, just 11 pages, and gives a summary of what the examiners are looking for in each area for the CAMELS rating.  Be ready by documenting your story of what you have done and are doing during the COVID-19 pandemic, including action plans being addressed.  You want to show your examiners that you can operate your bank during a pandemic in a safe and sound matter.

If you need assistance with this guidance, contact Artisan Advisors. For more information regarding COVID-19, including key references and additional articles, visit our COVID-19 web page. 


1 The federal financial institution regulatory agencies are the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Board), Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA) (collectively, the agencies).

2 Institutions include insured depository institutions, U.S. operations of foreign banking organizations (FBOs), bank holding companies, savings and loan holding companies, federally insured credit unions, and Edge Act corporations.

3 See Proclamation 9994, Declaring a National Emergency Concerning the Novel Coronavirus Disease COVID-19 Outbreak, 85 FR 15337 (March 18, 2020)

4 See the Federal Financial Institutions Examination Council’s (FFIEC’s) Uniform Financial Institutions Rating System, FR 67021 (December 19, 1996). NCUA examiners will refer to NCUA Letter to Credit Unions 07-CU-12, CAMEL Rating System when assigning the CAMEL ratings (December 2007).

5 See Board’s SR Letter 19-4/CA Letter 19-3 Supervisory Rating System for Holding Companies with Total Consolidated Assets Less Than $100 Billion, and SR Letter 19-3/CA Letter 19-2 Large Financial Institution (LFI) Rating System.

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