UPDATED – October, 2012 – Two institutions in the past ten days have told me that they have been assigned a CAMELS score of “1” in their latest examination.  One institution regained their 1 after slipping to a 2 in their last exam cycle, and the other went up to a 1 for the first time.  The FDIC is the primary federal regulator for both institutions.  What is your experience?  (Original post below the polls)

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During a panel discussion recently at our annual user conference, we heard this from a banker who was quoting an examiner during their last examination.  They had slipped from a CAMELS 1 rating to a 2, and in discussing the reasoning with the Examiner in Charge they said that they should be satisfied with a 2, because “2 is the new 1”.

Just 3 years ago Tony Plath, a finance professor at the University of North Carolina Charlotte, said that (at least for large banks) a CAMELS score of anything less than “1” was cause for concern.  These days it almost seems that examiners are digging for anything they can find to justify NOT assigning the highest rating.  Indeed I had a recent conversation with an FDIC examiner who said (off the record) “if we find anything at all to document during our examination, that is enough to disqualify them for a “1” rating”.

Unlike the comparatively significant difference between a “2” and a “3”, the differences between a “1”, defined as “Sound in every respect” and a “2”, defined as “Fundamentally sound” are extremely subtle, and there is no clear line of demarcation between them.  Often it comes down to examiner opinion.

So pick your battles and push back where you can, but understand that although you should be familiar with the criteria for a “1” rating, and strive to achieve it, you should be quite satisfied with a “2”…at least for now.