This is not a blog post about how to empty your backyard of unwanted exotic pets.

A recent US Court of Appeals decision out of the Seventh Circuit, Builders Bank v. Federal Deposit Insurance Corporation, is attracting attention because it appears to say that a bank that does not like its supervisory—or CAMELS, which stands for Capital, Assets, Management, Earnings, Liquidity, and Sensitivity to market risk—rating may sue the federal banking agency to challenge the rating. Given the central status and impact of the supervisory CAMELS ratings system in the pantheon of bank regulation, the ability of a bank to challenge a bad CAMELS rating in court might be a dream come true for some. We have read the decision, however, and for the time being, to borrow a phrase from the comedy TV show, we will “curb our enthusiasm” over the “right” conferred by this decision.

The facts of the case are simple: A Federal Deposit Insurance Corporation (FDIC) regulated state bank was examined by the FDIC and received a low CAMELS rating. The bank challenged the low rating, saying it was “arbitrary and capricious” within the meaning of the Administrative Procedure Act (APA), which allows a court reviewing a “final agency action” of a federal administrative agency to invalidate the action if it is found to be arbitrary and capricious.

The court of appeals reversed and remanded to the lower court (US District Court for the Northern District of Illinois) its decision dismissing the bank’s case for lack of jurisdiction, where the district court ruled that because the assignment of CAMELS ratings was committed to the FDIC’s discretion by law, the FDIC’s action was not reviewable under the APA (see 5 U.S.C. § 701(a)(2)). The court of appeals ruled as follows:

  • Under the APA, judicial review of the FDIC’s exercise of discretion concerns the merits of the agency’s action, and not the court’s jurisdiction to review the FDIC’s action.
  • Although the CAMELS rating may not be a “final agency action” of the sort that is required in order to be judicially reviewable under the APA, the bank’s judicial challenge and the FDIC’s acquiescence in that challenge mean that the court is not obliged to dismiss the action on jurisdictional grounds as unreviewable under the APA where the low rating has a concrete impact on the bank (in the form of higher deposit insurance premiums).
  • Even assuming the FDIC has discretion by law to establish minimum capital levels for its supervised banks (which appeared to be the primary basis for the low CAMELS rating in this case), the presence of capital as one of the seven components of the CAMELS rating “does not necessarily mean that the rating as a whole is committed to agency discretion” under the APA.

We will step over the first two points, which may be of interest primarily to APA geeks aficionados, and move directly to the last point, which we read as an invitation for the district court to decide, on remand, whether the FDIC’s assignment of ratings to the noncapital components of the CAMELS rating is a matter that is within the FDIC’s discretion by law. If the court’s answer to that question on remand is yes—and there is a good chance that that will be the outcome—we will be left with the unremarkable result that the banking agencies have broad discretion to assign CAMELS ratings that are very difficult, if not impossible, to challenge in court. In turn, this result would come as absolutely no surprise to anyone who lives and works in the world of bank examination and supervision. If the district court rules the other way, however, then we can get excited—but not until then.