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CAMELS rating system

Read about the CAMELS rating system.

In a 2 page analysis report critically review the CAMELS rating system for assessing bank performance. Also explain why it is fast becoming a global standard adopted by central banks. Do you believe this is the correct tool to use for evaluating banks? Support your position with justifications and examples

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The CAMELS rating system uses six factor to evaluate banks. The six factors are capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk. The bank supervisory authority assigns a score on a scale of one (highest) to five (lowes0 for each factor. If the bank has a score of less than two it is considered to be positive, however, a score greater than three is frowned upon.
The CAMELS rating system has several shortcomings. The system gives equal weight to each of the six factors. This is not in accordance to the real life situations. To get the correct picture of bank performance different weights need to be attached to different factors. For instance, sensitivity to market risk and capital adequacy cannot be assigned the same weight under all conditions. In addition, the fact that supervisors assign rating values to each factor makes the ...

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