Question

1. One way the federal government attempts to promote stability in the banking system is by sending examiners from the FDIC, the Fed, and the Office of the Comptroller of the Currency to banks to check whether they are following regulations. After an examination, the bank receives a CAMELS rating.
   1. What is a CAMELS rating?
   2. What happens if a bank has a low CAMELS rating?

Answer 1

A.

The mentioned rating refers to the rating of the banks that is awarded to them after the stringent supervision, reviews and ratio analysis by the concerned authorities as mentioned. Here, CAMELS stand for capital adequacy ratio, Asset quality, management capabilities, earnings made by the bank, liquidity position held by the banks and sensitiveness of the bank. These ratios and information are identified by the authorities and a composite rating named as CAMELS rating is given to the banks. The rating 1 is highest, showing robust performance, proper compliance and proactive risk management  and rating 5 is lowest, indicating poor and vulnerable state of the bank.

B.

In this scenario, the corrective measures are given to the bank, with time bound guidelines. During this period, the concerned bank is under strict monitoring and supervision so that the condition improves, rather it gets worsened over a period of time. So, the bank has to work according to the plan and improve the asset quality and capital adequacy ratio among the others. Besides, management also gets reinforcements with capable people taking the reins to improve the decision making process.