Make Camels Ratings Public Already
By Karen Shaw Petrou
Had OTS been forced to tell us what it should have known about Washington Mutual and Countrywide in 2007, OTS would have been subjected to widespread ridicule that would have forced it to intervene and, even at that late date, perhaps avert billions in losses across the financial system.
In 2001, when I called for Camels disclosures, bank regulators were joined by community bankers in close alliance against Camels disclosures. The regulators believed that public disclosure would compromise their ability to talk straight to troubled banks and community bankers. They worried that any disclosures about such straight talking would be painful, if not terminal, for the bank. I countered with reminders about ways some of the straight-talking could be muted to give banks time to clean up without giving regulators too much cover. But Camels remained secret, as it continues to be today.
In recent expert-witness work, I’ve read several inspector general reports on what the federal banking agencies, including the OTS, did and did not do from 2000 to 2009 for now-failed banks. The reason I’ve come back to Camels is because the IG reports are so startling in how many bright blinking lights each of these federal regulators either didn’t see or didn’t think much about. For good measure, state supervisors were no better. Reading the examination reports that underlie the post-mortems is even more depressing because the magnitude of the often simple control failures that went undisciplined is still more evident.
Camels disclosures would not mean that all of the assumptions and excuses that blinded examiners would come to light. Exam reports should stay secret. But releasing the aggregate Camels number will permit investors and analysts to spot disconnects between what they see as they survey a bank and what regulators should remedy or may be missing altogether.
Because Camels tracks critical issues like liquidity and interest-rate risk, disclosures will also provide a useful cross-check on undue reliance on capital adequacy. Strong capital can oversell a bank’s health. All too many banks were well-capitalized just before their other weaknesses killed them. Prompt corrective action today is so hard-wired to capital that other causes of bank weakness — well known though they are — are often overlooked in disciplinary action until it’s too late.
The hard-wired focus on capital is problematic not only for individual banks, but also for the financial system as a whole. We don’t know Camels ratings because they’re confidential, but I strongly suspect they are procyclical. They give ratings for past problems and so are lagging indicators. Currently, the scores reflect problems so late in the process it’s as if they’re merely meant to show regulators are aware of a bank’s distress, but that doesn’t help ready the bank for emerging risk. If regulators won’t or can’t make Camels public, they can and should study this question to be sure Camels work as they should and advance the Federal Reserve’s countercyclical objectives. If the agencies don’t do this, the Government Accountability Office should.
Bankers are of course responsible for the banks they run, but banks are unique institutions with public benefits over which supervisors must stand ever-vigilant. Without reforms to current procedures that increase supervisory transparency, agency accountability and interagency coordination, we run the real risk of yet another systemic-risk catastrophe, not to mention unnecessary bank failures along the way that harm investors, depositors and their communities.
Karen Shaw Petrou is managing partner of Federal Financial Analytics.