CAMEL is an internationally-based rating system used by banking organizations to rate financial institutions. The system is based on six elements represented its acronym. The banking organizations assign ranks to financial institutions based on their business performance. The aspects of the CAMELS system include:
Capital Adequacy
An organization’s capital adequacy is assessed by the financial examiners by the use of financial trend analysis. The assessment also involves an institution’s compliance with dividend and interest rules. Other factors used organizational growth plans, risk control abilities, and concentrations on loans and investments among others.
Asset Quality
Asset quality is also used in rating a financial organization by considering its loans quality. In this case, assessment is based on comparing a company’s potential financial risk factors with the capital earnings. This determines a company’s stability when faced with financial risks and lastly, asset quality reflects an institution’s efficiency in investment practices and financial policies.
Management
Assessing an organization's management helps in determining whether a company can cope with financial stress. This assessment is based on whether an organization can detect, manage, control, and even react to daily financial risks and additionally, it helps in ensuring safe organizational operations.
Earnings
An institution's revenues are used to determine its competitiveness, capital expansion, and employees' retention. These factors are used to assess organizational performance which is a key factor used by financial organizations to rate companies. The financial examiners determine this by looking into growth, organizational stability, and net worth among others.
Liquidity
Liquidity involves the number of assets that an organization may convert to capital and this is determined by the risk of interest rate sensitivity, and ALM technical competence among others. Another essential element that forms the CAMELS system is sensitivity which covers how specific risks may affect organizational performance.
All the CAMELS elements are quite essential in providing quality and accurate rating depending on the institution’s performance. However, the most crucial component is earnings. This is because earnings provide the examiners with an organization’s financial stability and trends. For instance, a financially stable institution may have higher CAMELS rating than companies with inadequate capital.
