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Economic SYNOPSES short essays and reports on the economic issues of the day 2002 ■ Number 15 The Condition of Banks: What Are Examiners Finding? R. Alton Gilbert and Sarosh R. Khan ank supervisory agencies use on-site examinations the number of these banks that received CAMELS ratings to measure the condition of banks. Federal law of 3, 4, or 5 on those examinations begun during that quarrequires these agencies to examine each bank at ter. The shaded areas are recession periods. least once every 18 months. Most of these examinations CAMELS ratings downgrades from 1 or 2 to a 3, 4, or 5 assess six aspects of a bank’s operations: capital protection have been much less frequent since March 2001, the peak (C), asset quality (A), management competence (M), earnof the last expansion, than during the late 1980s and early ings strength (E), liquidity risk (L), and sensitivity to market 1990s. The percentage of banks downgraded in a quarter risk (S). According to this CAMELS system, a bank receives rose to just over 10 percent during the recession of the early a rating of 1 (best) through 5 (worst) on each of these six 1990s, peaking at about 11 percent in the fourth quarter of aspects as well as a composite rating. Composite CAMELS 1990. In contrast, the downgrade percentage was just above ratings of 1 or 2 indicate that supervisors consider a bank 2 percent during 2001 and the first quarter of 2002. By this to be in sound condition. Supervisors use a CAMELS 3 indicator, most banks continue to be in sound condition. rating for banks that exhibit some degree of concern in one The conclusion is unchanged if we weight the banks examor more areas; a rating of 4 or 5 indicates more serious ined in each quarter according to their assets. Thus, the problems. percentage of banks currently rated below CAMELS 2 is While the CAMELS ratings assigned to individual banks low by standards of recent years—and especially low by are confidential, comparison of CAMELS ratings across all standards of the prior recession period. ■ banks over time may provide useful information about the condition of U.S. banks as a whole. The percentage of banks rated below CAMELS Downgrades CAMELS 1 or 2 was substantially higher dur14 ing 1991 (a recession year) than during recent recessionary quarters. In the first quarter of Quarterly NBER Periods of Recession 12 1991, 17.8 percent of banks had CAMELS CAMELS Downgrade from 1, 2 to 3, 4, or 5 ratings of 3 and 10.1 percent had ratings of 4 10 or 5. In the first quarter of 2002, in contrast, 6.2 percent of banks had CAMELS ratings of 8 3 and 1.5 percent had ratings of 4 or 5. The CAMELS rating of a bank at a given 6 point in time reflects the results of an examination conducted sometime during the prior 4 18 months. The figure indicates the extent to which examiners identified problems during 2 exams conducted in each quarter since 1987. For each quarter, the denominator of the ratio 0 plotted in the figure is the number of banks that entered the quarter with a CAMELS 1 or 2 rating and were subject to examinations SOURCE: Federal Reserve System. begun during that quarter. The numerator is Q1 -1 98 7 Q1 -1 98 8 Q1 -1 98 9 Q1 -1 99 0 Q1 -1 99 1 Q1 -1 99 2 Q1 -1 99 3 Q1 -1 99 4 Q1 -1 99 5 Q1 -1 99 Q1 6 -1 99 7 Q1 -1 99 8 Q1 -1 99 Q1 9 -2 00 0 Q1 -2 00 Q1 1 -2 00 2 Percent B Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org
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