Question

What does the acronym CAMELS refer to in commercial bank examinations? What are the most important facets of an examination?

Answer 1

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CAMELS RATINGS : The financial condition of each bank is to be checked by Regulators, analysts and investors periodically. Banks are rated on various parameters, based on financial and non-financial performance. CAMELS rating is in very much use for assessment. CAMEL is made up of 6 Assessemnt factors.

• C—Capital adequacy: This indicates the bank's capacity to maintain capital adequate with the nature and extent of all types of risks, as also the ability of the bank's managers to identify, measure, monitor and control these risks.
• A—Asset quality: This measure reflects the magnitude of credit risk prevailing in the bank due to its composition and quality of loans, advances, investments and off-balance sheet activities.
• M—Management quality: Signalling the ability of the board of directors and senior managers to identify, measure, monitor and control risks associated with banking, this quali­tative measure uses risk management policies and processes as indicators of sound management.
• E—Earnings: This indicator not only shows the amount of and the trend in earnings but also analyses the robustness of expected earnings growth in future.
• L—Liquidity: This measure takes into account the ade­quacy of the bank's current and potential sources of liquidity, including the strength of its funds management practices.
• S—Sensitivity to market risk: This is a recent addition to the ratings parameters and reflects the degree to which changes in interest rates, exchange rates, commodity prices and equity prices can affect earnings and. hence, the bank's capital.