How strong are your CAMELS?

One of the consequences of the financial crisis of was a significant increase in the strength of regulatory frameworks for banks. This was, of course, entirely understandable: the banking and financial sector&#;s roles in the development of any economy cannot be overemphasised, as it&#;s the sector that fuels economies through mobilisation of deposits and allocation of credit for businesses. Hence, any instability can negatively affect the economy of any country.

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Transparency and accountability in banks are enhanced by supervisory regulations as these compel greater attention to be paid to the soundness of the banks. The choice of a suitable rating system for comparability and benchmarking is key. &#;CAMELS&#; provides such a system, and indeed the Basel Committee of the Bank for International Settlements recommends the CAMELS rating system as an early warning mechanism for the assessment of the overall soundness of banks.

What is CAMELS?

The CAMEL analysis &#; Capital Adequacy, Asset Quality, Management, Earnings and Liquidity &#; was created by bank regulatory agencies in the US in . In , a sixth component was added to measure banks&#; &#;sensitivity&#; to market risk, thereby becoming CAMELS. It is an international bank supervisory rating system applied to banks using a detailed analysis of ratios from financial statements used by bank regulators to evaluate the overall performance of banks and determine their strengths and weaknesses.

The first variable in the CAMELS rating is Capital Adequacy. It is an important indicator of the financial stability of a bank, and is defined as the minimum statutory reserve that banks are expected to keep. It gives depositors the confidence that the bank can meet any additional capital needs with no interruptions to its operations. It can be measured by ratios such as the capital to risk-weighted assets ratio and the debt-equity ratio. To meet Capital Adequacy requirements, financial institutions must comply with the prescribed risk-based capital requirement as well regulations on risk management, loan and investment portfolio, and growth plans in relation to the economic environment. The issue concerning the Capital Adequacy of internationally active banks is of prime importance to the Basel Committee, which sets minimum standards for Capital Adequacy in the Basel Accords.

Asset Quality is the net indicator after capital adequacy. Banks must be concerned with the quality of the assets on their balance sheets because non-performing assets negatively affect their profitability. The percentage of non-performing assets to total assets; and that of secured assets to total assets are good measures of the quality of a bank&#;s assets.

The third indicator is Management. How efficiently a bank is managed guarantees its growth and profitability because it is the responsibility of management to execute the strategy for the achievement of the required growth and profitability. The profit per employee (profit after tax/no. of employees) is a good indicator of management efficiency.

As the fourth indicator, Earnings represents how the quality of a bank&#;s earnings reflects its current performance and is also an indication of its future performance. Net interest margin (NIM) and return-on-assets (ROA) are good indicators of the profitability of a bank.

Liquidity is the fifth indicator and measures the extent to which a bank can meet its short-term financial obligations by converting assets into cash. Whilst investing for profitability, there must also be adequate liquidity for banks to meet their obligation to depositors and customers. Banks must therefore maintain adequate liquidity by keeping cash or assets which are easily convertible to cash. The loan-deposit ratio and liquid-assets to total assets ratios are useful for the assessment of liquidity.

The final indicator is Sensitivity to market risk which refers to the risk that changes in market conditions such as alterations in foreign exchange and interest rates could negatively affect a bank&#;s earnings or capital or both. This can be measured by the extent to which these changes can affect the bank&#;s earnings. For instance, a high total securities to total assets ratio is an indication of a high susceptibility to market risk.

Application of the CAMELS rating system

This is done by applying a rating scale of 1 to 5 (1 being the best and 5 the worst) to each of the six components. The overall condition of the bank is measured by bank regulators during the evaluation of the components of the CAMELS rating system. A rating of 1 indicates a strong performance whilst 2 is satisfactory. When performance and risk management practices are flawed to some degree, a rating of 3 is awarded and this generates supervisory concern. A rating of 4 is indicative of poor performance whilst 5 represents a critically deficient and unsatisfactory performance, requiring immediate remedial actions.

The CAMEL rating system is no doubt an essential tool for the identification of the financial strengths and weaknesses of a bank by evaluating the overall financial situation of the bank for any corrective actions to be taken. Results from CAMELS testing can help regulators to direct management of affected banks to formulate policies and strategic initiatives for the improvement of their financial performance.

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About the author:

Patricia Barnett-Quaicoo has 16 years of extensive banking experience in one of Africa&#;s foremost financial institutions. She holds the internationally recognised Professional Postgraduate Diploma in Governance, Risk and Compliance from the International Compliance Association, as well as a Treasury Dealing Certificate from the Financial Markets Association (ACI). Patricia holds a double MBA in Finance and International Business and is currently working on her Doctorate in Business Administration.

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References:

Bastan, M., Mazraeh, M. B. & Ahmadvand, A., . Dynamics of Banking Soundness Based on the CAMELS Rating System. Delft, s.n.

Jimenez, G., Ongena, S., Peydro, J.-L. & Saurina, J., . Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments.. Journal of Political Economy, 125(6), pp. -.

Lopez, J. A., . Federal Reserve Bank of San Francisco Economic Research. [Online]
[Accessed 14 December ].

NCUA, . Letter to the Credit Unions. Austin: NCUA.

Sahajwala, R. & Bergh, P. V. d., . Supervisory Risk Assessment and Early Warning Systems - Working Paper No. 4, Basel: Basel Committee on Banking Supervision.

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Well, of course you want a camel! Doesn&#;t everybody? You don&#;t want to be the only person left on your block who doesn&#;t own a camel, do you? Of course you don&#;t. So this very weekend, you are going to get up early, have a good breakfast, take your nose plugs and your face guard, and trot down to the local camel market.But before you buy, consider this:

Be sure you have the right climate for a camel: not too cold. If you live in Alaska or Greenland, ask for a Bactrian camel, or move somewhere warm.

Check to see if the zoning laws will let you keep a camel. If they won&#;t, get them changed,or move.

Make sure you live in a flat, sheet-like terrain. Camels don&#;t like hills or bumps. If you have hills or bumps, move.

Make sure your marriage won&#;t interfere with your keeping a camel. If it does, well&#;.you know the drill. You may as well plan to consider the camel a sort of animal wife, for keeping a camel has a lot in common with keeping a wife. You must give your camel all your love and commitment. Like some wives, camels are long-lived. They may live to be 30 or even 50, and they will want your complete affection and attention. They will expect Christmas presents, and flowers on Valentine&#;s Day.

What kind of a camel should you buy?

Actually, there are only two kinds of camels to choose from (more types coming soon!): the Bactrian camel and the dromedary camel, also called &#;He-of-the-One-Humped.&#; The Bactrian camel has two humps and is called something else. If you intend to ride your camel, this would be a good time to consider the humps. If you end up with a dromedary, you will have to find some way to balance yourself on top of the hump, or strap yourself behind the hump. This is contraindicated because you won&#;t be able to see where you&#;re going. Strapping yourself to the front doesn&#;t recommend itself, either, as camels don&#;t care to have people sitting on their necks, and may turn their heads and spit at you or worse, bite off your knee.

What about an old camel, or should I get a young one?

You would be better off with an older camel if you intend to ever approach it. Young camels are much less expensive, and for a good reason: they are&#;well, shall we say difficult to train. An older camel will already have been trained by some other fool, and even more important, you will not have to wait 40 years before being rid of it!

However, if you insist on a young beast, keep in mind that they are born in the winter. If you want to actually have a try at training it, snatch it still sweating (use caution here) from its mother and run as fast as you can toward home. There&#;s no guarantee you&#;ll get there.

At the camel market you will have a chance to talk things over with the owner of the beast that attracts you. You will want to ask him some questions, such as:

&#; Where did this camel come from? (&#;From Mama Camel&#; not an acceptable answer).
&#; Has it had any control problems in the past (problems controlling itself, or its owner)?
&#; Why are you selling it? (Missing fingers, kneecaps or nose-ends could be a clue).
&#; Has the camel ever seen a vet? If so, what for? What did the camel do to the vet, and to the owner, once it got him home?
&#; Has it been wormed? Is it wormed now? If not, when will it be wormed? (&#;When you get heem home&#; not an acceptable answer).
&#; Can this camel do any tricks? Like crouching so a rider may mount? Dismount? Wipe its own nose?

Look the camel over carefully before you agree to buy. Have the owner walk it around a bit. Does it stagger, list to one side or the other, gallop ahead dragging the owner with it? On the command &#;Go&#; does it go, or lie down groaning it&#;s too tired to work? Does the appearance of a stranger send it into a freakout? Can it get down and up without problems? Ask the owner to give you a bale of the hay the camel is eating now to take home with you.

Once you have purchased your camel, or even before, if allowed, you will want to take it to a vet who is experienced in camel care. This may require some traveling, but you want your camel to be healthy, don&#;t you? Especially if it bites you, right? Check with your state (if you still live in a state after all these moves), to see what kind of health tests your camel should have. Whatever is required, it is a good idea to take all that are on offer. (Don&#;t let your camel get wind of this, if you value your life). Despite any revulsion you might feel, check the camel&#;s droppings. They should be dark green in color. If they&#;re pink or orange or black, demand an explanation.

In transporting your camel to its new location, use a trailer &#; don&#;t rid it unless you don&#;t care whether you ever see your home again. Get a nice well-fitting trailer. Plan your route in advance and drive slowly so as not to fling camel and trailer this way and that &#; where the camel goes the trailer will also go. Keep this in mind.

The camel&#;s shelter should be prepared in advance. Your new camel needs a sturdy shelter, a paddock to roam in, a salt block, water and hay. Camels appreciate companions, so get it a donkey, a sheep or a horse to befriend. If you don&#;t have any of those, try a cat.

Camels are more sensitive than your average Tweety bird so make allowances. Put it in its paddock in daylight and introduce the shelter slowly. Keep a close eye on your camel because problems and irritants are sure to crop up. If it eats or steps on the cat, get a larger animal. If it steps on a nail, call the vet, then scour the paddock for any other sharp objects that you should have removed already. At least two weeks will be required for the camel to get used to it&#;s new diet. The process will be helped along if you mix some of the camel&#;s old hay in with the new.

If you have purchased a female camel, and you can through Job&#;s patience and periods of training get the beast to hold still long enough, you can milk your camel. Camel&#;s milk is rich in calcium and contains less lactose than cow&#;s milk; it&#;s higher in vitamin C and lower in cholesterol. It is difficult to distinguish it, but if you really try, you can.

Oh &#; one more thing. Before purchasing your camel, make sure it does not harbor any pests, especially the camel spider, which they say is in the habit of clinging to the belly of the camel and eating its way inside at its leisure. According to US soldiers returning from the Persian Gulf War, camel spiders:
&#; Can jump several feet into the air, and chase you at 25 mph, so perhaps you&#;d better practice up;
&#; Can grow to the size of dinner plates;
&#; Can make high-pitched screaming noises as they chase you, the further to terrify
you;
&#; Will sneak into your tent at night and clasp itself to your stomach, injecting a venomous anesthetic so you don&#;t know anything has happened until you wake up to find your bladder missing.

Fortunately, these claims have proved to be spurious, if not outright lies, no doubt designed to frighten incoming soldiers, but all the same, check under the camel to make sure.

Now, aren&#;t you glad you bought a camel? What more could a person want in a pet?

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