Question

1. While the CAMELS rating gives examiners a standardized way to evaluate a bank, it is not, by any stretch of the imagination, a perfect system. Why not?
2. Too Big to Fail - During the recession of 2008, we were introduced to this new term. A large bank or financial institution that engages in illegal activity many are not severely punished or have its officials charged with criminal activity. Why? What is the reason

Answer 1

1. CAMELS ratings will be not a perfect system because of these reasons-

A. camel rating is mostly dependent upon quantitative factors so it will be lacking the qualitative element in order to proactively determine a crisis.

B. This system suffers from interdeterminacy as they are using the books of accounts to provide these scores.

C. Books of accounts are not completely reliable and they can be manipulated at times.

D. this model is highly inconsistent in nature because it will not be providing with a consistent result.

E. this model is also non dynamic in nature and this will not be adopted in highly dynamic environment.

2. Too big to fail is an economic term that was discovered during the time of 2008 financial crisis which meant that the organisation were so big that they were taking high amount of risk and the government will still not allowed them to fail because any failure of such organisation will be leading to financial contagion and these financial contagion would be leading to collapse of the entire system so the government will be trying to bail out the corporation and even let these managers of big institution escape the law of the land and these large financial organisation can be getting away with manipulations in the books of accounts.