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Regulators use the CAMELS rating system to evaluate a bank’s level of risk and overall condition.

The system is comprised of six factors that make up the CAMELS acronym. They are:

  • Capital adequacy, as in the quality and amount of capital a bank can access.
  • Asset quality, which looks at a bank’s credit and how it identifies risk.
  • Management quality is concerned with the quality of a bank’s support and oversight.
  • Earnings, which explores how stable a bank’s earnings are.
  • Liquidity refers to how quickly a bank can turn assets into cash.
  • Sensitivity to market risk, which explores how sensitive the bank’s earnings are to adverse developments in the market, such as a sudden change in interest rates.

The system helps regulators identify banks that are in trouble. Each factor receives a rating between 1 and 5, with 1 being the best score.

Banks with an average rating of 1 or 2 pose the fewest concerns for regulators. Banks rated a 3 offer some degree of concern, while those rated 4 and higher are problem banks. They present medium to heightened levels of supervisory concern and need to make immediate changes.

Bank managers need to closely monitor their institution’s CAMELS rating to ensure their risk levels are not too high, and to take action if they are.

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