CAMEL model of rating was first developed in the 1970s by the three federal banking supervisors of the U.S (the Federal Reserve, the FDIC and the OCC) as part of the regulators’ “Uniform Financial Institutions Rating System”, to provide a convenient summary of bank condition at the time of its on-site examination.
The banks were judged on five different components under the acronym C-A-M-E-L:
C – Capital Adequacy
A – Asset Quality
M – Management Soundness
E – Earnings Capacity and
L – Liquidity
The banks received a score of ‘1’ through ‘5’ for each component of CAMEL and a final CAMEL rating representing the composite total of the component CAMEL scores as a measure of the bank’s overall condition. The system of CAMEL was revised in 1996, when agencies added an additional parameter ‘S’ for assessing “sensitivity to market risk”, thus making it ‘CAMELS’ that is in trend today.
Based on the recommendations of the Padmanbhan…show more content… This indicates the banks capacity to maintain capital commensurate with the nature and extent of all types of risks, as also the ability of the bank’s managers to identify, measure, monitor and control these risks. It reflects the overall financial condition of the banks and also the ability of management to meet the requirement for additional capital. This ratio acts as an indicator of bank leverage. Capital base of financial institutions facilitates depositors in forming their risk perception about the organization since Capital Adequacy is very useful for a bank to conserve and protect stakeholder’s confidence and prevent the bank from bankruptcy. Capital is seen as a cushion to protect depositors and promote the stability and efficiency of financial system around the world. It also specifies whether the bank has adequate capital to grip unanticipated losses. It also acts as a boundary for financial managers to maintain adequate levels of