Chapter: Business Science : Banking Financial Services Management : Mergers, Diversification and Performance Evaluation

Camels rating

Camels rating is a supervisory rating system originally developed in the U.S. to classify a bank's overall condition.



Camels rating is a supervisory rating system originally developed in the U.S. to classify a bank's overall condition. It's applied to every bank and credit union in the U.S. (approximately 8,000 institutions) and is also implemented outside the U.S. by various banking supervisory regulators.

The ratings are assigned based on a ratio analysis of the financial statements, combined with on-site examinations made by a designated supervisory regulator. In the U.S. these supervisory regulators include the Federal Reserve, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Federal Deposit Insurance Corporation.Ratings are not released to the public but only to the top management to prevent a possible bank run on an institution which receives a CAMELS rating downgrade. Institutions with deteriorating situations and declining CAMELS ratings are subject to ever increasing supervisory scrutiny. Failed institutions are eventually resolved via a formal resolution process designed to protect retail depositors.

The components of a bank's condition that are assessed:

         (C)apital adequacy




         (M)anagement Capability




         (L)iquidity (also called asset liability management)


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



    Capital level and trend analysis;


    Compliance with risk-based net worth requirements;


    Composition of capital;


    Interest and dividend policies and practices;


    Adequacy of the Allowance for Loan and Lease Losses account;


    Quality, type, liquidity and diversification of assets, with particular reference to classified assets;

    Loan and investment concentrations;


    Growth plans;


    Volume and risk characteristics of new business initiatives;


    Ability of management to control and monitor risk, including credit and interest rate risk;


    Earnings. Good historical and current earnings performance enables a credit union to fund its growth, remain competitive, and maintain a strong capital position;

    Liquidity and funds management;


    Extent of contingent liabilities and existence of pending litigation;


    Field of membership; and


    Economic environment.


Asset Quality

    Asset quality is high loan concentrations that present undue risk to the credit union;


    The appropriateness of investment policies and practices;


    The investment risk factors when compared to capital and earnings structure; and


    The effect of fair (market) value of investments vs. book value of investments.




Management is the most forward-looking indicator of condition and a key determinant of whether a credit union possesses the ability to correctly diagnose and respond to financial stress. The management component provides examiners with objective, and not purely subjective, indicators. An assessment of management is not solely dependent on the current financial condition of the credit union and will not be an average of the other component ratings.




The continued viability of a credit union depends on its ability to earn an appropriate return on its assets which enables the institution to fund expansion, remain competitive, and replenish and/or increase capital.In evaluating and rating earnings, it is not enough to review past and present performance alone. Future performance is of equal or greater value, including performance under various economic conditions. Examiners evaluate "core" earnings: that is the long-run earnings ability of a credit union discounting temporary fluctuations in income and one-time items. A review for the reasonableness of the credit union's budget and underlying assumptions is appropriate for this purpose. Examiners also consider the interrelationships with other risk areas such as credit and interest rate.


L)iquidity - asset/liability management


Asset/liability management (ALM) is the process of evaluating, monitoring, and controlling balance sheet risk (interest rate risk and liquidity risk). A sound ALM process integrates strategic, profitability, and net worth planning with risk management. Examiners review (a) interest rate risk sensitivity and exposure; (b) reliance on short-term, volatile sources of funds, including any undue reliance on borrowings; (c) availability of assets readily convertible into cash; and (d) technical competence relative to ALM, including the management of interest rate risk, cash flow, and liquidity, with a particular emphasis on assuring that the potential for loss in the activities is not excessive relative to its capital. ALM covers both interest rate and liquidity risks and also encompasses strategic and reputation risks.



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Business Science : Banking Financial Services Management : Mergers, Diversification and Performance Evaluation : Camels rating |

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