Loading the player...

What is the 'CAMELS Rating System'

CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym. Supervisory authorities assign each bank a score on a scale. A rating of one is considered the best, and a rating of five is considered the worst for each factor.

BREAKING DOWN 'CAMELS Rating System'

Banks that are given an average score of less than two are considered to be high-quality institutions. Banks with scores greater than three are considered to be less-than-satisfactory institutions.

The acronym CAMELS stand for the following factors that examiners use to rate bank institutions:

Capital Adequacy

Examiners assess institutions' capital adequacy through capital trend analysis. Examiners also check if institutions comply with regulations pertaining to risk-based net worth requirement. To get a high capital adequacy rating, institutions must also comply with interest and dividend rules and practices. Other factors involved in rating and assessing an institution's capital adequacy are its growth plans, economic environment, ability to control risk, and loan and investment concentrations.

Asset Quality

Asset quality covers an institutional loan's quality, which reflects the earnings of the institution. Assessing asset quality involves rating investment risk factors that the company may face and comparing them with the company's capital earnings. This shows the stability of the company when faced with particular risks. Examiners also check how companies are affected by the fair market value of investments when mirrored with the company's book value of investments. Lastly, asset quality is reflected by the efficiency of an institution's investment policies and practices.

Management

Management assessment determines whether an institution is able to properly react to financial stress. This component rating is reflected by the management's capability to point out, measure, look after and control risks of the institution's daily activities. It covers management's ability to ensure the safe operation of the institution as they comply with the necessary and applicable internal and external regulations.

Earnings

An institution's ability to create appropriate returns to be able to expand, retain competitiveness, and add capital is a key factor in rating its continued viability. Examiners determine this by assessing the company's growth, stability, valuation allowances, net interest margin, net worth level and the quality of the company's existing assets.

Liquidity

To assess a company's liquidity, examiners look at interest rate risk sensitivity, availability of assets that can easily be converted to cash, dependence on short-term volatile financial resources and ALM technical competence.

Sensitivity

Sensitivity covers how particular risk exposures can affect institutions. Examiners assess an institution's sensitivity to market risk by monitoring the management of credit concentrations. In this way, examiners are able to see how lending to specific industries affects an institution. These loans include agricultural lending, medical lending, credit card lending and energy sector lending. Exposure to foreign exchange, commodities, equities and derivatives are also included in rating the sensitivity of a company to market risk.

RELATED TERMS
  1. Bank Examination

    A bank examination is an evaluation of the safety and soundness ...
  2. Bank Rating

    A bank rating is provided to the public by the Federal Deposit ...
  3. Institutional Fund

    An institutional fund is a fund with assets invested by institutional ...
  4. Institutional Investor Index

    The Institutional Investor Index was a measure of sovereign debt ...
  5. Asset Quality Rating

    An asset quality rating evaluates the various risks, such as ...
  6. Regulation F

    Regulation F is a regulation that sets limits on the amount of ...
Related Articles
  1. Investing

    Introduction To Institutional Investing

    Investopedia explains: Learn about institutional investing and all of the major players in this field.
  2. Investing

    A Brief Guide To Institutional Investing

    Institutional investors are organizations that manage assets on others' behalf. They include pension funds, investment companies, insurance firms, endowments and private foundations.
  3. Investing

    Institutional ownership: Pros and cons

    Institutional ownership can both create and destroy value for shareholders. Learn how to stay ahead of the game.
  4. Trading

    Why Big Investors Are Bullish on Nike Stock

    Solid fundamentals and price action are making Nike stock attractive to institutional investors.
  5. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Are you planning on getting a loan from bank? Here is the information you need know on how banks set the interest rates to get the best possible deal.
  6. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  7. Financial Advisor

    Is Greater Oversight of RIAs Coming?

    RIAs may be entering an era of greater oversight by the Securities and Exchange Commission. Here's why.
  8. Trading

    Netflix Stock's Big Breakout May Have More Upside

    New highs for Netflix stock on large volume points to increasing demand by institutions.
RELATED FAQS
  1. How Is Capital Adequacy of a Bank Measured?

    Examine some of the different financial measurements that are most commonly used to assess capital adequacy within the banking ... Read Answer >>
  2. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
  3. Do I have to complete all exams within a certain period of time to receive the CFA ...

    According to the CFA Institute, a candidate can take as much time as necessary to complete all three levels of the CFA program. Read Answer >>
  4. What Does a High Capital Adequacy Ratio Indicate?

    Learn about the capital adequacy ratio, what the ratio measures, how it is calculated and what it means when a bank has a ... Read Answer >>
  5. What is the difference between the capital adequacy ratio vs. the solvency ratio?

    Understand the different applications for using the capital adequacy ratio and the solvency ratio, which are both equity ... Read Answer >>
Trading Center