FIN441 Assignment 2

Assignment on
“CAMELS Rating System”
Submitted to: Syed Nazmul Hossain

Lecturer, BRAC University
Submitted by:
Mahira Mondol
ID: 18104139
Course: FIN 441
Section: 01
BRAC Business School, BRAC University

16th August, 2022
Executive summary: The reports enlighten about the camels rating system, how it works
and its components.
CAMELS Rating System

CAMELS is an international rating system which is highly recognized and used by bank
supervisory authority in order to rate financial institutions in terms of six factors which are:
1. Capital adequacy
2. Assets
3. Management capability
4. Earnings
5. Liquidity
6. Sensitivity
CAMELS rating system has a score scale of 1-5. One is the highest possible score, while five is
the lowest possible score. So, through this rating system Bangladesh bank can determine the
strength or weaknesses and overall performance of the banks in the country. This rating is done
based on the financial statements of the banks, for example: profit or loss account and balance
sheet. Furthermore, central bank may also send officers to conduct on site examination. So, if the
performance of a bank is weak, corrective measures can be taken based on the evaluation.
Mechanism of the CAMELS Rating system:
For CAMELS rating system to work, a score is given to each category from 1-5.
The table is created to evaluate bank ‘X’ based on CAMELS Rating
Category Description Rating

Capital adequacy Does the bank have enough capital bare losses 1
Based on the credit quality what is the quality of the bank's
Asset quality assets 2.5
Management
capabilities ability to exploit profitable opportunities while managing risks 2
Earning Quality of earnings 3
Liquidity Ability to honor current liabilities 1
Sensitivity to market
risk exposer to change in interest rates 1
Total score 1.75
Scale 1 represents that the bank is performing very well with proper risk management
Scale 2 represents that the bank is financially sound with moderate weaknesses.
Scale 3 means it needs supervisory concerns in some areas.
Scale 4 indicates that the bank is unsafe because of serious financial problems
Scale 5 suggests that the bank is in very bad position with improper risk management practices.
The overall CAMELS ratings of the bank is 1.75 which is close to the scale of 2 that represents
that the bank is financially sound with some weaknesses.
Components of Camels ratings
Capital adequacy: capital adequacy means the amount of capital which includes loans and
investments, a financial institution holds as required by central bank. To calculate capital under
capital adequacy, the capital of the bank will be classified under 2 tiers.
1. Tier 1 capital
1.1 common equity tier 1 capital: common stocks, retained earnings, certain adjustments
1.2 additional tier 1 capital: instruments should be subordinate to deposits and other debt
obligations with no fixed maturity. If any instrument makes any dividend or
payment, it will fall under additional tier 1 capital.
2. Tier 2 capital: capital should be subordinated to deposits and to general creditors of the
bank with minimum maturity of 5 years.
Asset quality: the most important assets of the bank is the loan that it provides. If any bank has
huge amount of classified loans, we can say that the asset quality of that bank is bad and if the
bank has more unclassified loan, we can say the bank has been more careful about giving loans
by doing a lot of analysis and that’s why their asset quality is good.
Management: It involves when there is financial stress in the economy an institution can
properly react to it or not. When a bank has good capital and asset quality, their management
capability is good.
Earnings: it is important for bank to check whether it has a growth and stability on the earning
or not. Earnings is judged based on the returns on assets (ROA).
Liquidity: liquidity is important for customers withdrawal demand. Bangladesh bank has issued
NSFR to limit over reliance on short term funding and liquidity coverage ratio to assess the
exposure to liquidity.
Sensitivity to market: it means to sensitivity towards changing market condition. Interest rate,
foreign exchange rate, commodity prices affect the banking operation. This category shows how
sensitive is the bank to the market condition.

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FIN441 Assignment 2

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Assignment on

“CAMELS Rating System”

Submitted to: Syed Nazmul Hossain

BRAC Business School, BRAC University

CAMELS Rating System

Mechanism of the CAMELS Rating system:

The table is created to evaluate bank ‘X’ based on CAMELS Rating

Category Description Rating

Scale 3 means it needs supervisory concerns in some areas.

Components of Camels ratings

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