Instead, the Camels framework should be overhauled to include the results from a risk management quality scorecard. That scorecard would be based on a questionnaire that assesses a bank's risk culture, governance and infrastructure with specific emphasis on the institution's ability to identify, measure and manage risk. Each attribute would be rated numerically and assigned a weight that would roll up to an overall risk management score. The Camels ratings would become Carmels ratings, with risk management as a separate and quantifiable component in supervision and deposit insurance assessments.

To illustrate how these scores could influence bank attention on risk management, consider the following example.

A large bank today with a deposit assessment base of $100 billion would pay an annual base assessment of 5 to 35 cents per $100 of its assessment base, or a range of $50 million to $350 million depending on a complicated pricing algorithm used by FDIC that scales the final base rate up or down according the bank's total performance score described earlier. What is ironic about the deposit assessment scorecard is how it appears to be analytically rigorous but in the end allows the FDIC to assess up to an additional 15 basis points on a bank for major risks not captured in the scorecard. Allowing such a large fudge factor undermines the integrity of the scorecard and illustrates the overreliance on performance-based metrics that cannot accurately reflect the quality of the risk process.

Instead, if a risk management score made the difference between a base rate at the low or high end of that range, a swing of $300 million would certainly catch senior management's attention. Spending several million dollars to beef up risk management processes would be an easy decision to make if it saved hundreds of millions in deposits assessments each year. It may be impossible to regulate human behavior but when it comes to focusing on risk management, banks respond well to financial incentives and developing an effective risk quality scorecard tied to deposit insurance assessments is a logical step forward.

Clifford V. Rossi is the Executive-in-Residence and Tyser Teaching Fellow at the Robert H. Smith School of Business at the University of Maryland.