Question

Briefly explain the components of the CAMELS system.

Answer 1

CAMELS Rating : It is the rating developed in US to classify Bank or Credit Unions overall condition. The rating is on a scale of 1 to 5, with 1 being Very good rating & 5 being poor rating. If the rating is 1, the frequency of monitoring an Institution is less whereas for poor rating like 3,4,5 the supervisory scrutiny by regulator increases to protect the interest of retail depositors.

CAMEL abbreviation stands for as below:

(C)apital adequacy (A)ssets (M)anagement Capability (E)arnings (L)iquidity (also called asset liability management)

(S)ensitivity (sensitivity to market risk, especially interest rate risk)

The ratings determine following:

1. The soundness of Credit Unions

2. Degree of Risk to the share Insurance fund

3. Credit Union requiring special supervisory attention

The ratings are assigned based on a ratio analysis of the financial statements, combined with on-site examinations made by a designated supervisory regulator. These supervisory regulators include the Federal Reserve, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Farm Credit Administration, and the Federal Deposit Insurance Corporation.

NCUA ( National Credit Union Administration) field staff closely works with the management of credit unions with poor rating of 4 or 5, to come eith corrective action plan with respect to camel components that are below acceptable level.

CAEL in the camel are quantitative assessments of the credit union or banks, whereas 'M' stands for Management, is focused towards effectiveness of Board & Staff. Credit rating of 1 means the credit union has prioritised safety. NCUA expects the credit unions to take on risk but manage then as well.

Some of the Quantifiable Ratios used as part of CAMEL rating are:

1. Net worth to Total Assets

2. Return on average assets

3. Asset Quality

4. Cash & short term investments compared to assets

It also seeks to understand where the credit union is exposed to risk, examiner findinds if any are required to be worked upon by the management of Bank or Union under assessment. Findings can include Voilations of law or regulation, policies, & procedures.