CAMELS MODEL

An international bank-rating system where bank supervisory authorities rate institutions according to six factors. The six factors are represented by the acronym "CAMELS."

The six factors examined are as follows:

C - Capital adequacy A - Asset quality M - Management quality E - Earnings L - Liquidity S - Sensitivity to Market Risk
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CAMELS MODEL

Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for each factor. If a bank has an average score less than two it is considered to be a highquality institution, while banks with scores greater than three are considered to be less-thansatisfactory establishments. The system helps the supervisory authority identify banks that are in need of attention.

CAMELS MODEL

What Does Capital Adequacy Ratio CAR Mean? A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."
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CAMELS MODEL

This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
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CAMELS MODEL

What Does Asset Quality Rating Mean? A review or evaluation assessing the credit risk associated with a particular asset. These assets usually require interest payments - such as a loans and investment portfolios. How effective management is in controlling and monitoring credit risk can also have an affect on the what kind of credit rating is given.
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CAMELS MODEL

Many factors are considered when rating asset quality. For example, a portfolio is appropriately diversified, what regulations or rules have been put in to place to limit credit risks and how efficiently operations are being utilized. Typically, a rating of one shows that asset quality is good and there is very little credit risk, while a rating of five can signify that there are major asset quality problems and issues that need to be managed.
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CAMELS MODEL

What

Does

Liquidity

Mean?

1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold, are known as liquid assets. 2. The ability to convert an asset to cash quickly. Also known as "marketability".

There is no specific liquidity formula, however liquidity is often calculated by using liquidity ratios.
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CAMELS MODEL
Liquidity 1. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment.

2. Examples of assets that are easily converted into cash include blue chip and money market securities.
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What Does Market Risk Mean?

CAMELS MODEL

The day-to-day potential for an investor to experience losses from fluctuations in securities prices. This risk cannot be diversified away.
Also referred to as "systematic risk". The beta of a stock is a measure of how much market risk a stock faces.
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CAMELS MODEL

What

Does

Earnings

Mean?

The amount of company produces period.

profit that a during a specific

Earnings typically net income.

refer

to

after-tax

Ultimately, a business's earnings are the main determinant of its share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run.

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CAMELS MODEL

Earnings are perhaps the single most studied number in a company's financial statements because they show a company's profitability. A business's quarterly and annual earnings are typically compared to analyst estimates and guidance provided by the business itself. In most situations, when earnings do not meet either of those estimates, a business's stock price will tend to drop. On the other hand, when actual earnings beat estimates by a significant amount, the share price will likely surge (increased).

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