USAID-Funded Economic Governance II Project
Presented To: CBI Bank Supervision Examiners Date:2006-10-29 1
This document was prepared by: Patrick Y. Trautmann BearingPoint
This document is protected under the copyright laws of the United States and other countries: it has been prepared by BearingPoint, Inc. (“BearingPoint”) Technical Advisors and/or contractors working directly for BearingPoint under the auspices of the U.S. Agency for International Development (“USAID”) contract number 267-C-00-04-00405-00. This document and all accompanying pages are strictly for the use of USAID in support of their own consideration regarding the subject matter contained herein. Except where explicitly stated otherwise, the following information was prepared on the basis of data that is publicly available or was provided by USAID: it has not been independently verified or otherwise examined to determine its accuracy, completeness or financial feas bility (where applicable). Neither BearingPoint, USAID nor any person acting on behalf of either assumes any liabilities, expenses (including attorney’s fees and legal expenses) fines, penalties, taxes or damages (collectively “liabilities”), resulting from the use of any information contained in this document.
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Review the key components of CAMELS ratings. Understand their meaning and their application to commercial banks. There are six elements: — — — — — —
Capital adequacy Asset quality Management Earnings Liquidity Sensitivity to market
Purpose of CAMELS ratings
The purpose of CAMELS ratings is to determine a bank’s overall condition and to identify its strengths and weaknesses: Financial Operational Managerial
Each bank is assigned a uniform composite rating based on six elements. The system provides a general framework for evaluating the banks. It is a standardized method which allows the assessment of the quality of banks according to standard criteria providing a meaningful rating. CBI does not take into consideration the Sensitivity to Market Risks.
Each element is assigned a numerical rating based on five key components: 1 2 3 4 5 Strong performance, sound management, no cause for supervisory concern Fundamentally sound, compliance with regulations, stable, limited supervisory needs Weaknesses in one or more components, unsatisfactory practices, weak performance but limited concern for failure Serious financial and managerial deficiencies and unsound practices. Need close supervision and remedial action Extremely unsafe practices and conditions, deficiencies beyond management control. Failure is highly probable and outside financial assistance needed
Based on the ratings of each element, a composite rating of 1 through 5 is assigned to the bank. All the factors reflected in the key components ratings are considered in assigning the composite rating.
Capital is rated based on the following considerations:
Nature and volume of problem assets in relation to total capital and adequacy of LLR and other reserves Balance sheet structure including off balance sheet items, market and concentration risk Nature of business activities and risks to the bank Asset and capital growth experience and prospects Earnings performance and distribution of dividends Capital requirements and compliance with regulatory requirements Access to capital markets and sources of capital Ability of management to deal with above factors
Capital rating 1
Rating “1” is characterized by:
Capital levels and ratios exceed all regulatory requirements Strong earnings performance Well managed and controlled growth Competent management able to analyze the risks associated with the activities in determining appropriate capital levels Reasonable dividends and ability to...