CAMELS Rating System

When you have the peace of mind to deposit your money in a bank and not worry that it will close tomorrow, you can thank the CAMELS rating system. In a nutshell, CAMELS stands for:

Capital Adequacy: a healthy balance sheet and low risk exposure
Asset Quality: diversification and quality of loans
Management: adequacy of audits and internal controls
Earnings: quality and source of earnings
Liquidity: Availability of assets that can be converted to cash
Sensitivity to Market Risk: nature and complexity of interest rate exposure

Ratings range from one to five, with one being the highest and five meaning there is a large amount of regulatory "concern." Ratings are determined for a particular point in time and little or no advance notice is given before the auditors show up. So if anyone is embezzling money or handing out loans without sufficient collateral, the auditors will find it.

Any score greater than two could result in an "enforcement action" by federal regulators. That could involve cease and desist orders, written agreements and get-well plans, and specific actions the bank must take. The only problem is that CAMELS is an internal rating system and the results are strictly confidential. The public has to trust that if there are problems with a particular bank, they are being addressed.