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Camel_Approach_Camel_Approach-CAMELS_Analysis.docx

Camel_Approach_Camel_Approach-CAMELS_Analysis.docx -...

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Introduction The banking sector has been facing a lot of changes and phases of restructuring with a view to make it sound, efficient, and creating links that make it firm to promote savings, investments and growth. Although a complete turnaround of the banking sector is not expected till completion of reforms, there are significant signs of improvement in the banking industry under the CAMELS framework. Here, banks are required to enhance their capital adequacy, strengthen their asset quality, improve on management, increase earnings and reduce their sensitivity to various financial risks. The nature and extent of such developments makes it hard to disentangle the positive impact of reform measures. The CAMELS tool is one of the most effective, efficient and accurate tool used to evaluate the performance of banks and to anticipate their future and relative risks. The ratios obtained through the tools focus specifically on financial performance. The CAMELS is used to refer to Capital adequacy, Asset quality, Management, Earning and Liquidity and Sensitivity where a banking institution is rated from one to five in every category. Being a supervisory rating system, it was originally created to classify a bank’s general condition. It later went to be applied to different banks and credit unions in the US and outside the US by different banking supervisory regulators. In applying the CAMELS tool, ratings are assigned to banks according to a ratio analysis framework of the financial statements combined with on-site examinations made by a designated supervisory regulator. Usually, the ratings are not released to the public but only to the top management to prevent a possible bank run on an institution that receives a CAMELS rating downgrade. Most of the times, the banks that have a declining CAMELS rating are
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