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Camels rating system


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Published in: Economy & Finance, Business

Camels rating system

  1. 2. <ul><li>The camels rating is a US supervisory rating of the bank’s overall condition </li></ul><ul><li>This rating is based on financial statements of the bank and on-site examination by regulators like the fed, and the Federal Deposit Insurance Corporation. </li></ul>
  2. 3. <ul><li>anagement </li></ul><ul><li>arnings </li></ul>apital adequacy Sset quality iquidity Ensitivity to market anagement arnings
  3. 5. <ul><li>The CAMEL Rating System was adopted by National Credit Union Administration in October 1987. </li></ul><ul><li>It is used as an internal tool to measure risk and allocate resources for supervision purposes. </li></ul><ul><li>The last version of CAMEL Rating System was published in Letter to Credit Unions NO.161,dated December 1994. </li></ul>
  4. 6. <ul><li>The purpose of CAMELS ratings is to determine a bank’s overall condition and to identify its strengths and weaknesses: </li></ul><ul><li>Financial </li></ul><ul><li>Operational </li></ul><ul><li>Managerial </li></ul>
  5. 7. CAMEL RATINGS <ul><li>The scale is from 1 to 5 with 1 being strongest and 5 being weakest. </li></ul><ul><li>Banks with a rating of 1 are considered most stable; with 2 or 3 are considered average, </li></ul><ul><li>and those with rating of 4 or 5 are considered below average, and are closely monitored to ensure their viability. </li></ul>
  6. 8. CAMELS COMPOSITE RATINGS <ul><li>The composite rating is also based upon a scale of 1 through 5 in ascending order of supervisory concern. </li></ul><ul><li>The CAMELS rating components have following weights: </li></ul><ul><li>Capital Adequacy 20% </li></ul><ul><li>Asset Quality 20% </li></ul><ul><li>Management 25% </li></ul><ul><li>Earnings 15% </li></ul><ul><li>Liquidity 10% </li></ul><ul><li>Sensitivity to market risk 10%. </li></ul>
  7. 9. <ul><li>Capital adequacy is measured by the ratio of capital to risk weighted assets . </li></ul><ul><li>A sound capital base strengthens confidence of depositors: </li></ul><ul><li>Nature and volume of assets in relation to total capital and adequacy </li></ul><ul><li>Balance sheet structure including off balance sheet items. </li></ul><ul><li>Nature of business activities and risks to the bank </li></ul><ul><li>Asset and capital growth experience and prospects </li></ul><ul><li>Earnings performance and distribution of dividends </li></ul>
  8. 10. <ul><li>Asset represents all the assets of the bank, </li></ul><ul><li>current and fixed , loan portfolio , investments and real estate owned as well as off balance sheet transactions </li></ul><ul><li>Volume of problem of all assets </li></ul><ul><li>Volume of overdue or rescheduled loans </li></ul><ul><li>Ability of management to administer all the assets of the bank </li></ul><ul><li>Large concentrations of loans, diversification of investments </li></ul><ul><li>Loan portfolio management, written policies, procedures internal control, </li></ul><ul><li>Growth of loans volume in relation to the bank’s </li></ul><ul><li>capacity </li></ul>
  9. 11. <ul><li>Management includes all key managers and the Board of Directors: </li></ul><ul><li>Quality of the monitoring and activities by the board and management </li></ul><ul><li>ability to understand and respond to the risks and to plan for the future </li></ul><ul><li>Development and implementation of policies, procedures, risk monitoring system , compliance with laws and regulations. </li></ul><ul><li>Availability of internal and external audit function </li></ul><ul><li>Overall performance of the bank and its risk profile </li></ul>
  10. 12. <ul><li>All income from operations, non-traditional sources, extraordinary items. It can be measured as the return on asset ratio: </li></ul><ul><li>Sufficient earnings to cover potential losses, provide adequate capital and pay reasonable dividends </li></ul><ul><li>Composition of net income. </li></ul><ul><li>Level of expenses in relation to operations </li></ul><ul><li>Adequacy of budgeting, forecasting, </li></ul><ul><li>Earnings exposure to market risks, such as interest rate variations, foreign exchange fluctuations and price risk </li></ul>
  11. 13. <ul><li>Cash maintained by the banks and balances with central bank, to total asset ratio is an indicator of bank's liquidity. </li></ul><ul><li>Sources and volume of liquid funds available to meet short term obligations </li></ul><ul><li>Volatility of deposits and loan demand </li></ul><ul><li>Interest rates and maturities of assets and liabilities </li></ul><ul><li>Access to money market and other sources of funds </li></ul><ul><li>Reliance on inter-bank market for short term funding </li></ul><ul><li>Management ability to plan, control and measure liquidity process. </li></ul>
  12. 14. <ul><li>Sensitivity to market risks is not taken into consideration by CBI. </li></ul><ul><li>Sensitivity to adverse changes in interest rates, foreign exchange rates, commodity prices, fixed assets. </li></ul><ul><li>Nature of the operations of the bank. </li></ul><ul><li>Trends in the foreign currencies exposure. </li></ul><ul><li>Changes in the value of the fixed assets of the bank. </li></ul>