CAMELS rating system

The CAMELS rating is a supervisory rating system originally developed in the U.S. to classify a bank's overall condition. It is applied to every bank and credit union in the U.S. and is also implemented outside the U.S. by various banking supervisory regulators.

The ratings are assigned based on a ratio analysis of the financial statements, combined with on-site examinations made by a designated supervisory regulator. In the U.S. these supervisory regulators include the Federal Reserve, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Farm Credit Administration, and the Federal Deposit Insurance Corporation.

Ratings are not released to the public but only to the top management to prevent a possible bank run on an institution which receives a CAMELS rating downgrade.^[1] Institutions with deteriorating situations and declining CAMELS ratings are subject to ever increasing supervisory scrutiny. Failed institutions are eventually resolved via a formal resolution process designed to protect retail depositors.

The components of a bank's condition that are assessed:

• (C)apital adequacy
• (A)ssets
• (M)anagement Capability
• (E)arnings
• (L)iquidity (also called asset liability management)
• (S)ensitivity (sensitivity to market risk, especially interest rate risk)

Ratings are from 1 (best) to 5 (worst) in each of the above categories.

In India, for supervision (inspection) of banks, an extended framework is used which is named - C A M E L S C where the letters C A M E L stand for what has been mentioned above but 'S'- means- 'Systems' and 'C' means- 'Compliance' - to various rules, regulations, Acts. etc.^[2]