CAMELS Rating System
CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym. Assessing asset quality involves rating investment risk factors the bank may face and balance those factors against the bank's capital earnings. CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym. Examiners determine this by assessing the bank's earnings, earnings' growth, stability, valuation allowances, net margins, net worth level, and the quality of the bank's existing assets. Other factors involved in rating and assessing an institution's capital adequacy are its growth plans, economic environment, ability to control risk, and loan and investment concentrations.
What Is the CAMELS Rating System?
CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym. Supervisory authorities assign each bank a score on a scale. A rating of one is considered the best, and a rating of five is considered the worst for each factor.
Understanding the CAMELS Rating System
Banks that are given an average score of less than two are considered to be high-quality institutions. Banks with scores greater than three are considered to be less-than-satisfactory institutions. The acronym CAMELS stands for the following factors that examiners use to rate bank institutions:
Capital Adequacy
Examiners assess institutions' capital adequacy through capital trend analysis. Examiners also check if institutions comply with regulations pertaining to risk-based net worth requirements. To get a high capital adequacy rating, institutions must also comply with interest and dividend rules and practices. Other factors involved in rating and assessing an institution's capital adequacy are its growth plans, economic environment, ability to control risk, and loan and investment concentrations.
Asset Quality
Asset quality covers an institutional loan's quality, which reflects the earnings of the institution. Assessing asset quality involves rating investment risk factors the bank may face and balance those factors against the bank's capital earnings. This shows the stability of the bank when faced with particular risks. Examiners also check how companies are affected by the fair market value of investments when mirrored with the bank's book value of investments. Lastly, asset quality is reflected by the efficiency of an institution's investment policies and practices.
Management
Management assessment determines whether an institution is able to properly react to financial stress. This component rating is reflected by the management's capability to point out, measure, look after and control risks of the institution's daily activities. It covers management's ability to ensure the safe operation of the institution as they comply with the necessary and applicable internal and external regulations.
Earnings
Liquidity
To assess a bank's liquidity, examiners look at interest rate risk sensitivity, availability of assets that can easily be converted to cash, dependence on short-term volatile financial resources and ALM technical competence.
Sensitivity
Sensitivity covers how particular risk exposures can affect institutions. Examiners assess an institution's sensitivity to market risk by monitoring the management of credit concentrations. In this way, examiners are able to see how lending to specific industries affects an institution. These loans include agricultural lending, medical lending, credit card lending, and energy sector lending. Exposure to foreign exchange, commodities, equities, and derivatives are also included in rating the sensitivity of a company to market risk.
Related terms:
Asset Quality Rating
An asset quality rating evaluates the various risks, such as credit, to a pool of assets. read more
Bank Examination
A bank examination is an evaluation of the financial health of a bank. They are primarily concerned with the strength of the bank’s balance sheet. read more
Bank Rating
Learn more about bank ratings, a grade provided to the public by the FDIC and/or other private companies on the safety and soundness of banks and thrift institutions. read more
Capital Adequacy Ratio – CAR
The capital adequacy ratio (CAR) is defined as a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. read more
Checking Account
A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more
Commodity
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. read more
Country Limit
In banking, a country limit refers to the limit placed by a bank on the amount of money that can be lent to borrowers in a particular country. read more
General Examination
A general examination is a regulatory measure set up to give a detailed assessment of all aspects of a bank. read more
Liquidity
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. read more
Regulation W
Regulation W is a Federal Reserve System regulation that limits certain transactions between banks and their affiliates. read more