CAMELS Rating System

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CAMELS Rating System

A mnemonic device for the factors by which regulators determine banks' riskiness. The rating system goes on a scale from one to five, with one showing the least risk and five the most risk. The factors break down as follows:

C - Capital Adequacy
A - Quality of Assets
M - Quality of Management
E - Earnings
L - Liquidity
S - Sensitivity of the Bank to Market Risk
References in periodicals archive ?
122) Among the possible factors to consider are: CAMELS ratings, how the midsize companies performed in previous DFAST cycles, and current market factors that affect specific risks associated with individual company activities.
30) The CAMELS ratings are also used to determine the price banks pay for deposit insurance.
We proxy for the intensity of bank supervision using bank supervisory CAMELS ratings as banks with poor CAMELS ratings are typically subjected to heightened scrutiny from supervisors as they are required to remedy significant safety and soundness weaknesses identified in the examination.
We limit the banks identified as thriving banks to those with CAMELS ratings of 1 for two reasons.
The CAMELS ratings detailed in the OCC's notice of charges: capital, downgraded to 3; asset quality, downgraded to 4; management, downgraded to 4; earnings, "deteriorated" to 2; liquidity, downgraded to 3; overall composite rating, downgraded to 3.
While the FDIC plans to continue employing capital ratios and CAMELS ratings, the FDIC plans to use a variety of available statistics to help evaluate the risk level of an individual insured large bank.
Table 1 Proposed FDIC Risk Categories for Pricing Deposit Insurance Weighted CAMELS rating 1-2 3 4-5 Well capitalized I II III (2-4 bps) (7 bps) (25 bps) Well capitalized II II III (7 bps) (7 bps) (25 bps) Undercapitalized III III IV (25 bps) (25 bps) (40 bps) Note: The six CAMELS ratings (see footnote 9) would be weighted as follows: 25 percent, C; 20 percent, A; 25 percent, M; 10 percent, E; 10 percent, L; and 10 percent, S (FDIC 2006, 34).
CAMELS ratings were pulled from a nonpublic portion of the National Information Center database; only examiners, analysts, and economists involved in supervision at the state or federal level can access these series.
As a result of actions by insurers, the agencies have requested the assistance of the National Association of Insurance Commissioners in notifying insurance companies that the practice of requesting or requiring CAMELS ratings should be discontinued.
They find that the information content of the CAMELS ratings derived from on-site examinations can decay fairly rapidly.
One study which provides a very brief although interesting attempt to integrate the information provided by efficiency measures with that found in CAMELS ratings is by Simeone and Li (1997).
For simplicity, this study applies the term CAMEL to both CAMEL and CAMELS ratings.