by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The FDIC developed an acroynm for the composite ratios it runs to “rate” the financial health of its member banking concerns. An index, ranging from one to five is calculated and the FDIC premium charged to the institution is commensurate with its CAMELS rating. “CAMELS” stands for:
- Capital Adequacy
- Asset Quality
- Management
- Earnings
- Liquidity
- Sensitivity
The Federal Reserve Bank of San Francisco explains the CAMELS ratings and the highly-sensitive nature of the findings:
All exam materials are highly confidential, including the CAMELS. A bank’s CAMELS rating is directly known only by the bank’s senior management and the appropriate supervisory staff. CAMELS ratings are never released by supervisory agencies, even on a lagged basis. While exam results are confidential, the public may infer such supervisory information on bank conditions based on subsequent bank actions or specific disclosures. Overall, the private supervisory information gathered during a bank exam is not disclosed to the public by supervisors, although studies show that it does filter into the financial markets.
The average depositor might freak out if he discovered her bank had a 4 or 5 CAMELS rating and withdraw her deposits. How can a depositor do her homework if the bank can’t tell you its CAMELS rating ? The good folks at BankRate.com have developed a similar system, loosely based on the CAMELS litmus test. Here is how they describe their “Safe and Sound” ratings system:
Bankrate’s Safe & Sound ratings are comparisons to both industry peer norms and standards. In a very small number of instances, operating strategies that differ from industry norms lead to ratings that are not truly reflective of an institution’s financial condition. A Safe & Sound rating of one or two stars does not suggest that we believe direct regulatory action is imminent or even likely but rather only indicates that certain below-average performance factors have been found during the applicable rating cycle. Quarterly updates of Safe & Sound ratings allow us to monitor changes that may occur, and ratings may fluctuate on a quarterly basis.
The most desirable Safe & Sound ratings is five stars; the least desirable is one. Performing institutions will generally receive a rating of three or more stars with the majority of financial institutions falling into the three- to four-star range.
Bankrate.com used to call this the CAELS rating (since they didn’t have the “M” feedback). Essentially, Bankrate.com uses the same data the FDIC uses (absent the discussion about a bank’s management), puts it through a screen of 22 questions, and compares the bank to others in a peer group.
Depositors can screen by “ratings” and discover all the five star banks in their state. The ratings are not always accurate but the financial data, that accompanies the rating can be very useful. Ojai Community Bank in California, for example, is a five-star rated bank with NO non-performing assets and plenty of cash. The Foothills Bank in Yuma, AZ, has a tiny percentage of non-performing assets and low residential real estate exposure.
Bankrate.com’s “Safe and Sound Rating” is as much a ratings agency as Zillow.com is a property valuations firm. While not precisely accurate, both websites aggregate data to feed into an algorithm that produces…
…a starting point.
That allows you to initiate an intelligent discussion with your banker. Until the FDIC releases the CAMELS data that’s about the best you’ll get. It is NOT perfect but it IS better than what we had five years ago.
Dave says:
Brain, Thankyou for posting this. I entered Bank of America. Unfortunately good ole Bankrate shows a 3 star rating. Not believable. Another example of not telling the truth to try to prevent a run on B of A? A run on any bank is not desireable. But the need for the true story outweighs that. Or maybe their methodology is not as capable as they would have us think and this is just another PR move by Bankrate. Somewhere, sometime we may get an entreprenuer to do one of these that won’t fudge the ratings. I am hoping and waiting.
Dave
March 11, 2009 — 6:00 am
Brian Brady says:
“Unfortunately good ole Bankrate shows a 3 star rating. Not believable. Another example of not telling the truth to try to prevent a run on B of A?”
That might have been true at the time they published it, Dave. The problem with Safe and Sound is that the ratings are based on old data (9/30/08). I’m guessing the re-rating, based on 12/31/08 data will be less than 3 stars for BofA.
If I were a large depositor, I’d print off the financial data, bring it in to the bank and ask for updated financial statements to review with the personal banker. The marked difference would insipre some good questions.
March 11, 2009 — 6:08 am
Scott says:
Yeah, I don’t buy the CAMEL. I hadn’t even been aware of this until reading. Seems fair, but overall its not.
March 11, 2009 — 9:07 am
Sean Purcell says:
Brian,
When the Treasury begins its new “litmus” test for banks’ ability to withstand doomsday, do you think they’ll announce the findings or will that also be kept secret?
March 11, 2009 — 9:29 am
Thomas A B Johnson says:
Midnight at the oasis
Send your CAMEL to bed
You won’t need your CAMEL
when I take you for a ride…
http://www.youtube.com/watch?v=CnLOSA_XZcY
’nuff said.
March 11, 2009 — 6:20 pm