CAMELS ratings

Overview

OBJECTIVES:

Review the key components of CAMELS ratings. Understand their meaning and their application to commercial banks. There are six elements:

1.        Capital adequacy

2.        Asset quality

3.        Management

4.        Earnings

5.        Liquidity

6.        Sensitivity to market

Purpose of CAMELS ratings:

The purpose of CAMELS ratings is to determine a bank’s overall Condition and to identify its strengths and weaknesses:

•   Financial
•   Operational
•  Managerial

Rating System:

1.  Each bank is assigned a uniform composite rating based on six elements. The system provides a general framework for evaluating the banks.

2.  It is a standardized method which allows the assessment of the quality of banks according to standard criteria providing a meaningful rating. 

3.  CBI does not take into consideration the Sensitivity to Market Risks.

Rating Provisions:

Each element is assigned a numerical rating based on five key components:

1     Strong performance, sound management, no cause for supervisory concern.

2   Fundamentally sound, compliance with regulations, stable, limited supervisory needs.

3   Weaknesses in one or more components, unsatisfactory practices, weak performance but limited concern for failure.

4   Serious financial and managerial deficiencies and unsound practices. Need close supervision and remedial action.

5   Extremely unsafe practices and conditions, deficiencies beyond management control. Failure is highly probable and outside financial assistance needed.

Based on the ratings of each element, a composite rating of 1 through 5 is assigned to the bank. All the factors reflected in the key components ratings are considered in assigning the composite rating.