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Banking & Finance
A N E IG H T H D IST R IC T PE R SP E C T IV E
FALL 1986

CAMEL Rating —
Regulators’ Guide to Bank Performance
The rising number of bank failures has increased
popular attention on the role of bank examinations and
their impact on the safety of the banking system. By
assessing the operating soundness and financial viability
of the institution, a bank examination is intended to
identify financial problems and recommend corrective
action that, if the problems are manageable, will forestall
a bank failure. In order to measure the health of an
institution, examiners have relied on an evaluation system
known as the CAMEL rating.
The CAMEL performance rating is based upon an
evaluation of five critical dimensions of a bank’s
operations. This article examines each aspect of a bank’s
performance evaluated by these criteria and describes how
an overall performance rating is determined.
The specific dimensions of the evaluation form the
acronym CAMEL: Capital adequacy, Asset quality,
Management/administration, Earnings and Liquidity.
Each measure of performance is rated on a scale of one
through five in descending order of performance quality.
Thus, one represents the highest performance and five
the lowest (and most critically deficient) level of operating
performance.

concerned with whether the current level of capital could
absorb shrinkage in asset value and other losses the bank
may incur. Banks typically receive a lower rating if they
hold a higher-than-normal degree of risky assets.

Asset Quality
The quality of a bank’s asset portfolio influences
earnings and shareholder wealth. The regulatory agencies
rate asset quality relative to (a) the level, distribution and
severity of classified assets, (b) the level and composition
of nonaccrual and reduced-rate (renegotiated) assets, (c)
the adequacy of loan loss reserves, and (d) demonstrated
ability to administer and collect problem credit. To a large
degree, the rising number of bank failures in recent years
can be traced to the deterioration of an institution’s asset
portfolio. As a result, examiners are focusing added
attention on the quality of a bank’s assets.

Management/Administration

The competence of a bank’s management staff is
crucial to the overall operations of the bank. Management
is rated with respect to (a) technical competence,
Capital Adequacy
leadership and administrative ability, (b) compliance with
banking regulations and statutes, (c) ability to plan and
Bank capital is defined as the difference between a
respond to changing circumstances, (d) adequacy of and
bank’s assets and its liabilities. Among
compliance with internal policies, and (e)
other functions, capital serves as a buffer
demonstrated willingness to serve the
against loan losses. The adequacy of a
legitimate banking needs of the community
bank’s capital is rated (one through five)
it serves. Examiners are responsible for
in relation to (a) the volume of risky assets,
THE
determ ining w hether the bank’s
FEDERAL
(b) the volume of marginal and inferiormanagement has instituted policies and
RESER\E
RANK of
quality assets, (c) plans for growth in bank
operating procedures which guide the bank
M. m ils
size, and (d) capital ratios relative to the
within accepted banking practices and in
b ank’s peer group. Exam iners are
a safe and sound manner.



FEDERAL RESERVE BANK OF ST. LOUIS

Earnings
Earnings are rated according to their level (quantity)
and their composition (quality). The quantitative aspect
of earnings is evaluated by analyzing the bank’s return
on assets (ROA) relative to peer institutions. The ROA
ratio (net income as a percent of total assets) gauges how
well the bank’s management is employing its assets. The
level of earnings is rated with respect to (a) the ability
to cover losses and provide for adequate capital, (b)
earnings trends, (c) peer group comparisons, (d) quality
and composition of net income, and (e) the rate of growth
of retained earnings. Examiners are concerned with banks
that have negative earnings or earnings that, although
positive, may be characterized by mounting loan losses
or a downward earnings pattern.

Liquidity
Liquidity is evaluated on the basis of the bank’s capacity
to meet the demand for payment of its obligations
promptly and to fulfill the reasonable credit needs of the
community. Liquidity is rated with respect to (a) the
volatility of deposits, (b) reliance on interest-sensitive
funds and frequency and level of borrowing, (c)
availability of assets readily convertible into cash, and
(d) access to money markets or other ready sources of
cash. As clearly demonstrated in recent years, a bank’s
liquidity position rests heavily on depositors’ confidence.
As a result, examiners must determine the impact of
adverse changes in the bank’s environment on the
institution’s current liquidity position.
Having determined the individual rating for each of the
five performance dimensions, an overall or composite
rating is calculated. As a preliminary determination of
the overall rating, a simple average is calculated by
summing the individual performance ratings. This
averaging process assigns equal weight to each
performance dimension, which may or may not be
realistic, depending upon the circumstances of any given
bank. Therefore, before a final composite rating is
assigned, the examiner subjectively determines whether
the preliminary rating provides an accurate reflection of
the bank’s condition. The composite rating also is based
upon a scale of one through five in ascending order of
supervisory concern and reflects the institution’s financial

FALL 1986

condition, compliance with banking regulations and
operating soundness. The five composite ratings are
defined and distinguished as follows:

Composite 7—Banks in this category are sound
institutions in virtually every respect; any critical findings
are basically of a minor nature and can be handled in
a routine manner.

Composite 2—These banks also are fundamentally
sound institutions but may reflect modest weaknesses that
can be corrected in the normal course of business.
Although such banks are stable, this score indicates that
areas of weakness could develop into conditions
warranting greater concern. To the extent that the minor
adjustments are handled in the normal course of business,
the supervisory response is limited.

Composite 3—Banks in this category exhibit a
combination of weaknesses and could easily deteriorate
into serious problems if corrective action is not effective.
Consequently, such banks are vulnerable to adverse
business conditions and require more than normal
supervision. Overall strength and financial capacity,
however, still make bank failure at the present time only
a remote possibility.

Composite 4—A bank in this category has an
exceptional volume of asset weaknesses and, unless
prompt action is taken to correct these deficiencies, the
future viability of the institution could be impaired. The
bank requires close supervisory attention and financial
surveillance.

Composite 5—This category is reserved for banks
whose volume and character of weaknesses are such as
to require urgent aid from the shareholders or other
sources. Such banks require immediate corrective action
and constant supervisory attention. The probability of
failure is high for these institutions.
—Lynn M. Barry

Banking & Finance—An Eighth District Perspective is a quarterly summary of banking & finance conditions in the area served
by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public
Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are
not necessarily official positions of the Federal Reserve System.



FEDERAL RESERVE BANK OF ST. LOUIS

FALL 1986

EIGHTH DISTRICT BANKING DATA

LARGE WEEKLY REPORTING BANKS1
R ates o f C h an g e

Level
111/1986

($ millions)

Current
Quarter

Current
Year

11/1986111/1986

111/1985111/1986

Same Periods
Previous Year
11/1985111/1985

111/1984111/1985

Selected Assets & Liabilities
Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
Loans to Financial Institutions
All Other Loans

$16,886
5,591
4,035
3,756
1083
2,422

Total Securities
U.S. Treasury & Agency Securities
Other Securities
Total Deposits
Non-Transaction Balances
MMDAs
$100,000 CDs
Demand Deposits
Other Transaction Balances2

14.2%
- 0 .2
19.3
21.8
128.1
- 0 .4

10.4%
5.4
17.8
10.1
11.0
10.8

5.2%
-1 0 .5
23.2
7.1
21.0
12.7

10.5%
3.7
23.0
7.2
-1 4 .7
34.3

3,866
2,280
1,585

13.8
36.4
-1 1 .0

2.1
- 1 .7
8.2

- 2 .7
- 2 .9
- 2 .2

2.5
- 1 .4
9.3

19,662
11,992
2,661
3,593
5,764
1,904

6.2
2.0
19.2
- 9 .8
10.0
23.2

6.3
3.2
19.6
-1 .1
10.2
21.9

- 0 .8
- 4 .0
20.4
-2 1 .3
- 2 .7
8.6

4.2
4.8
17.2
- 3 .7
- 0 .7
14.3

SMALL WEEKLY REPORTING BANKS3

Level
111/1986

($ millions)

Current
Quarter

Rates of Change
Current
Same Periods
Year
Previous Year

11/1986111/1986

111/1985111/1986

11/1985111/1985

111/1984111/1985

Selected Assets & Liabilities
Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
All Other Loans
U.S. Treasury & Agency Securities
Other Securities
Total Deposits

$5,383
1,561
1,089
2,280
453

8.0%
- 3 .7
15.6
18.5
-1 3 .0

8.0%
2.1
7.9
13.5
3.5

2.0%
- 8 .3
- 2 .9
4.3
53.9

1,992

5.0

1.1

- 3 .6

1.5

768

11.1

11.4

8.8

2.5

8,199

8.1

2.4

7.2

8.1

7.6%
0.6
8.2
10.4
20.9

All data are not seasonally adjusted.
1 A sample of commercial banks with total assets greater than $750 million. Historical data have been revised to incorporate adjustment factors
that offset the cumulative effects of mergers and other changes involving weekly reporting banks during 1985. These adjustment factors, which are
computed each year, are used to construct a consistent time series for which year-to-year growth rates can be calculated. Adjustment factors are available
upon request from the Statistics Section of the Research and Public Information Department. Rates of change are compounded annual rates.
2 Includes NOW, ATS and accounts permitting telephone or pre-authorized transfers.
3 A sample of commercial banks with total assets less than $300 million as of January 1984.




3

EIGHTH DISTRICT BANKING DATA
Bank Performance Ratios
RATIOS

11/1986

11/1985

11/1984

78.20%
58.50

80.09%
60.00

74.94%
60.02

1.49
1.33

1.53
1.16

1.34
1.07

3.68
4.87

4.13
4.92

4.03
4.61

0.29
0.35

0.26
0.35

0.19
0.22

Loans to Deposits
Large Banks4
Small Banks5

Loan Loss Reserves to Total Loans
Large Banks
Small Banks

Delinquent Loans to Total Loans
Large Banks
Small Banks

Net Loan Losses to Total Loans
Large Banks
Small Banks

EIGHTH DISTRICT INTEREST RATES6
Year Ago
Sept. 1986______ Aug. 1986______ July 1986______ Sept. 1985
NOWs
MMDAs
Time CDS
92 — 182 days
1 — 2 1/2 years
2 1/2 years and over

5.21%
5.48

5.26%
5.63

5.31%
5.90

6.04%
6.91

5.71
6.40
6.77

5.89
6.44
6.81

6.19
6.79
7.15

7.44
8.39
8.84

4 All Eighth District banks with total assets greater than $750 million. Ratios are derived from Call Reports.
5 All Eighth District banks with total assets less than $300 million.
6 Average interest rates paid on new deposits by a sample of Eighth District commercial banks.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102