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The
CAMELS ratings or
Camels rating is a United States supervisory rating of the
bank's overall conditionBank condition is a random variable used to represent the probability of failure of a bank. The true probability of failure is unknown to depositors....
used to classify the nation’s fewer than 8,000 banks. This rating is based on financial statements of the bank and on-site examination by regulators like the Federal Reserve, the
Office of the Comptroller of the CurrencyThe Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
and
Federal Deposit Insurance CorporationThe Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
. The scale is from 1 to 5 with 1 being strongest and 5 being weakest. These ratings are not released to the public but only to the top management of the banking company to prevent a
bank runA bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
on a bank which has a bad CAMELS rating.
It is a tool being used by the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
government in response to the global financial crisis of 2008 to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the
Emergency Economic Stabilization Act of 2008The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
.
Credit unions in the United StatesCredit unions in the United States served 89 million members as of 2008, comprising 43.7% of the economically active population. U.S. credit unions are not-for-profit, cooperative, tax-exempt organizations....
use the similar
CAMEL rating systemThe CAMEL rating system is a method of evaluating the health of credit unions by the National Credit Union Administration. The rating, adopted by the NCUA in 1987, is based upon five critical elements of a credit union's operations:* Capital...
.
Components
The components of a bank's condition that are assessed:
- (C) Capital adequacy,
- (A) Asset quality
Asset quality an evaluation of an asset to measure the credit risk associated with it.-Description:Asset quality is related to the left-hand side of the bank balance sheet. Bank managers are concerned with the quality of their loans since that provides earnings for the bank...
,
- (M) Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
,
- (E) Earnings
Earnings are the net benefits of a Corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before...
,
- (L) Liquidity and
- (S) Sensitivity to Market Risk
based these features Credit rating agencies rate instruments proposed to issue by the respective company.