Many of you know me as an industry advisor, but before I founded CCG Catalyst, I was a bank executive for a number of years. I have seen firsthand how frameworks like CAMELS can help banks but also pose operational challenges. As we begin 2026, the Federal Reserve and lawmakers are considering major updates to the CAMELS system (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk). These proposed revisions aim to make bank oversight fair and precise. After reading commentary from across the industry, I became curious about how these changes might impact banks.
The Heart of the Reforms
At its core, the push for CAMELS modernization addresses long-standing gripes, such as subjectivity in ratings, overreach on non-material issues, and thresholds that penalize growth rather than risk. Drawing from Fed Governor Michelle Bowman’s recent address and initiatives of the Main Street Capital Access Act, the reforms prioritize material financial risks over peripheral concerns. Supervisory tools like Matters Requiring Attention (MRAs) and Immediate Attention (MRIAs) would be reserved for genuine threats, while “observations” make a comeback for constructive dialogue without escalation.
Think of the “Management” component, often a hotspot for vague judgments. Proposals aim to ground it in objective metrics tied to risk profiles, ditching vague concepts like “reputational risk” that can morph into catchalls. And then there is the game-changer indexing asset thresholds to nominal GDP. This is not just tweaking numbers, it’s about ensuring regulations evolve with the economy, potentially lifting benchmarks for a $100 billion Category IV banks to $140 – $150 billion, and higher for others. It is a nod to reality, preventing organic expansion from triggering undue scrutiny.
Building on last year’s tweaks to the Large Financial Institution (LFI) ratings, these moves signal a broader commitment to consistency and resilience. Yet, as with any change, the devil’s in the details and the execution.
Breathing Room for Community Banks
These reforms could offer much needed relief for community banks serving various markets such as rural and underserved areas. Strict thresholds often hinder these institutions with complex compliance, but tying requirements to GDP would allow many to use simpler options like the Community Bank Leverage Ratio (CBLR), potentially lowered to 8% or less for new rural banks.
Implementing objective CAMELS criteria would help prevent subjective downgrades, reduce remediation expenses, and allow more focus on customer service. Approving mergers more quickly, with notification periods of 30 days and decisions within 90 would create an environment that encourages both consolidation and innovation. Introducing phased capital for new banks could stimulate de novo activity, offering a competitive response to fintechs and strengthening credit availability within local communities.
Of course, challenges linger. Limited resources mean even refined exams demand vigilance. But overall, this is about empowerment, leveraging nimbleness and community ties to thrive, not just survive.
Mid-Sized and Regional Banks
Regional banks with asset sizes between $10 billion and $250 billion frequently experience significant regulatory pressures. As these institutions grow, they are subject to stricter regulatory categories, including stress tests and liquidity requirements that may impact their operational flexibility. Raising regulatory thresholds could offer relief, for example, a bank surpassing the current $10 billion asset threshold is immediately subject to enhanced requirements, such as CFPB oversight, Durbin Amendment debit fee caps, and more comprehensive stress testing and reporting standards. This surge in compliance obligations can substantially increase operational costs (potentially by 20-30%) and divert resources from core activities such as lending and innovation.
Indexing the regulatory threshold to GDP, thereby increasing it to approximately $14–$15 billion, would postpone the onset of these regulations and allow regional banks greater latitude to pursue organic growth. This adjustment would enable such institutions to maintain profitability and operate under less stringent supervisory conditions for a longer period. Additionally, implementing a more focused CAMELS framework, one that assesses actual risks, such as asset quality and liquidity, rather than relying solely on size should enhance regulatory efficiency. Examinations would address specific vulnerabilities rather than applying broad criteria. As Representative French Hill, Chairman of the House Committee on Financial Services, discussed last month, regulatory tailoring based on business models instead of asset size could benefit specialized institutions, such as those focused on commercial real estate, by better aligning oversight with risk profiles.
However, maintaining an appropriate balance remains crucial. Excessively high thresholds could leave regional banks at a disadvantage compared to larger entities designed to operate within more demanding regulatory frameworks. While increased flexibility is advantageous, it is essential to remain watchful regarding competitive positioning within the industry.
Large Banks
For the titans over $250 billion, these reforms extend the 2025 LFI refinements, honing “well-managed” standards for systemic players. While threshold indexing offers marginal direct relief, a risk-aligned approach could ease bindings like enhanced supplementary leverage ratios, acting more as backstops than constraints.
Transparent Management ratings reduce litigation from subjectivity, while emphasis on material risks sharpens focus on high-stakes areas like market sensitivity. This frees capital for lending, fueling economic growth. Still, expect intensified scrutiny where it counts, demanding robust upgrades.
In essence, these changes could widen the playing field, but megabanks’ scale positions them to adapt swiftly, potentially amplifying their lead if smaller peers’ falter.
Charting a Resilient Future
As these proposals unfold, through Fed directives or legislation like the Main Street Act, the banking sector stands at a pivotal juncture. For all banks, the promise is a system that’s fairer, more adaptive, curbing shadow banking while boosting inclusivity. Community lenders gain vitality, regionals get growth leeway and large banks obtain efficiency.
Success requires action, not luck. Test your portfolios, consider fintech partnerships, and push for necessary changes. For 2026 planning, seek guidance from experienced advisors. Adapt authentically to achieve long-term results. Contact me if you have questions or if you plan to be in Phoenix for one of the various bank conferences, reach out and let’s meet.
