Essay About Summary Of Camelsobjectivesthis Summary And Companys Overall Condition

Camels
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Summary of CamelsObjectivesThis summary intends to review the key components of CAMELS ratings. Understand their meaning and their applicationsIntroductionThe CAMELS rating is a supervisory rating system originally developed in the U.S. to classify a companys overall condition. Its applied to every bank and company in the U.S. (approximately 8,000 institutions) and is also implemented outside the U.S. by various banking supervisory regulators.The ratings are assigned based on a ratio analysis made by a designated supervisory regulator. In the U.S. these supervisory regulators include the Federal Reserve, the Office of the Comptroller of the Currency, the National Company Administration, the Farm Credit Administration, and the Federal Deposit Insurance Corporation.Ratings are not released to the public but only to the top management to prevent a possible bank run on an institution which receives a CAMELS rating downgrade.Elements of the CAMELS ratingCAMELS is a tool for company valuation. The CAMELS rating is based upon 6 components:LetterMeaningCCapital adequacyAAsset qualityMManagement capabilityEEarningLLiquidity availabilitySSensitivity to market riskEach of those 6 components is rated from 1 to 5: LetterMeaning1Excellent standard2Good standard3Acceptable with areas of concerns4Preoccupying5CatastrophicCapital adequacyExplanation of conceptCapital represents the resources provided by owners. Capital is important for 2 reasons:The shared capital gives a little idea of the financial capabilities of a company and provides a guarantee for creditors. (economic reason)It provides a justification of ownership (legal reason)Stakeholders can be ranked as follow (by order of importance):StateEmployeesClients + SuppliersShareholdersCriterion in assessment of capital adequacyIn the study of capital adequacy, examiners reckon: Capital level and trend analysisThe capital level gives an idea of the financial capabilities of a company whereas the trend of capital will give a basic outline of the capital evolution for many years.Compliance with risk-based net worth requirementsComposition of capitalInterest and dividends policies and practices Choose to place dividends in investment makes capital increase. Adequacy of the allowance for loan and lease losses accountQuality, type, liquidity and diversification of assetsLoan and investment concentrationGrowth plansThose plans have an impact on dividends policies and then on capital when dividends are used for investment. Volume and risk characteristics of new business initiatives Liquidity and funds managementRatingRatingCircumstancesMeaning1Excellent in every criterion seen above. The company is “well capitalized”2Excellent with some Goods The company is “adequately capitalized”3Good and acceptable everywhereThe company is “undercapitalized”4Some preoccupying areas (at least 1)The company will become “critically undercapitalized” within 12 months.5Some catastrophic areas (at least 1)The company is “critically undercapitalized”Qualitative analysisQuestionYes / NoRating keyRating Does amount of capital meet international requirements?YesA1Other questions………TotalQuantitative analysisCapital adequacy2010200920062007Capital Adequacy Ratio[pic 1]Equity to total asset ratio[pic 2]Asset qualityExplanation of conceptAssets play an important role in the profitability of a company. They have a lifetime and they depreciate. So their valuation gives an idea of what the company uses to produce income. Also, assets must be dispatched into a portfolio. They must be diversified in order to minimize risk. So the repartition of a company’s assets has an impact on asset quality.