Bukidnon State University

College of Business

CAMELS RATING SYSTEM OF BANKING OPERATIONS

SUBMITTED BY: CANUNAYON, RANZEL JOY S.

SECTION CODE: B381

SUBMITTED TO: DR. JESUS JUEVESANO

 CAMELS RATING SYSTEM OF BANKING OPERATIONS

Financial institutions are rated by bank supervisory bodies using the CAMELS
method, which is a widely accepted international rating system. Each bank is given a
grade on a scale by the supervisory authorities. For each factor, a rating between one
and five is regarded as the best and the worst.High-quality financial institutions are
defined as those with an average score of under two. A bank is deemed to be less-than-
satisfactory if it receives a score of three or higher. "Capital adequacy, Asset quality,
Management, Earnings, Liquidity, and Sensitivity" (CAMELS) is the abbreviation for
these six factors.

Let us talk first the six factors of CAMELS. First is the Capital Adequacy, through
capital trend analysis, examiners determine if institutions have adequate capital.
Examiners also look for compliance with laws governing risk-based net worth criteria at
institutions. Institutions must follow regulations governing interest and dividend
payments in order to receive a good capital adequacy rating. Other elements that go
into rating and evaluating an institution's capital sufficiency include its expansion plans,
the overall state of the economy, its capacity to manage risk, and the concentrations of
its loans and investments.

Second is the Asset Quality, it is the quality of an institutional loan that is

determined by its asset quality, which shows the institution's profitability. Rating
investment risk variables that the bank might encounter and weighing them against the
bank's capital profits are both necessary steps in assessing asset quality. This
demonstrates the bank's stability when exposed to specific dangers. Examinators also
look at how corporations are impacted by the difference between the book value of
investments at the bank and the fair market value of investments. The effectiveness of
an institution's investment rules and procedures is a final indicator of asset quality.

Third is the Management, If a company can respond to financial hardship in a

suitable manner depends on management assessment. This component assessment is
based on the management's capacity to identify, quantify, monitor, and manage risks
associated with the institution's everyday operations. It encompasses management's
capacity to guarantee the institution operates safely while adhering to the pertinent and
necessary internal and external regulations.

Fourth is the Earnings, one of the fundamental criteria used to determine a bank's
long-term survival is its capacity to generate enough revenue to support its operations,
grow, and maintain its competitiveness. In order to do so, examiners consider the
bank's earnings, growth in earnings, stability of earnings, valuation allowances, net
margins, level of net worth, and the caliber of the bank's current assets.

Fifth is the Liquidity, examiners consider the sensitivity of a bank's interest rate risk,
the presence of easily convertible assets, the reliance on unstable short-term financial
resources, and the technical proficiency when determining a bank's liquidity.

Lastly is the Sensitivity, it refers to the potential impact on institutions of specific

risk exposures. By observing how credit concentrations are managed, inspectors can
gauge how sensitive a given institution is to market risk. Examiners can thus see the
effects of lending to particular industries on an institution in this way. Among these loans
are those for the energy sector, credit cards, agriculture, and medicine. The rating of a
company's market risk sensitivity also takes into account the exposure to commodities,
equities, derivatives, and foreign exchange.

The CAMEL grading system is unquestionably a vital instrument for determining a

bank's strengths and flaws by assessing the bank's overall financial status and
recommending any necessary remedial steps. Results of the CAMELS testing can
assist regulators in instructing management of impacted banks to develop policy and
strategic initiatives for the enhancement of their bank profitability. Moreover, it is a
minimal statutory reserve that banks are required to maintain and serves as a vital gauge of a
bank's financial viability. It gives depositors the assurance that the bank can cover any
additional capital requirements without causing business delays.
Reference:

•Kagan, J. (2022, September 27). Camels rating system: What it is, how it is calculated.
Investopedia. Retrieved January 23, 2023, from
https://www.investopedia.com/terms/c/camelrating.asp#:~:text=CAMELS%20is%20an
%20international%20rating,%2C%20Liquidity%2C%20and%20Sensitivity.%22

•Insight #bigcompconvo : How strong are your camels? . (n.d.). Retrieved January 23, 2023,
from https://www.int-comp.org/insight/2020/february/04/camels-analysis/