Question

The CAMELS system in commercial bank is referred to?

Answer 1

CAMELS is an international rating system used by regulatory banking authorities to rate financial institutions, according to the six factors represented by its acronym. The CAMELS acronym stands for "Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity."

The CAMELS rating system is adopted as a tool for determining the strengths and weaknesses of the various financial institutions and rating their performance in the economy by the supervisory authorities of a country.

The CAMELS rating system is highly efficient to determine the risk level associated with financial institutions. It has majorly served the following purposes:

Financial Condition: To determine the financial health and soundness of the institution, the CAMELS rating system is widely used.

Operational Condition: CAMELS rating system analyzes the institution’s liquidity position and manages risk is to ensure sound operational condition.

Managerial Condition: It also indicates management’s efficiency of handling risks, managing sources of funds, liquidity position and earnings potential of the institution.