R. Alton Gilbert

Sarosh R. Khan

English

Research Papers in Economics

July 2002 
MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
www.research.stlouisfed.org
The Condition of Banks:
What Are Examiners Finding?
Bank supervisory agencies use on-site examinations to
measure the condition of banks. Federal law requires these
agencies to examine each bank at least once every 18
months. Most of these examinations assess six aspects of
a bank’s operations: capital protection (C), asset quality
(A), management competence (M), earnings strength (E),
liquidity risk (L), and sensitivity to market risk (S). Accord-
ing to this CAMELS system, a bank receives a rating of 1
(best) through 5 (worst) on each of these six aspects as
well as a composite rating. Composite CAMELS ratings
of 1 or 2 indicate that supervisors consider a bank to be in
sound condition. Supervisors use a CAMELS 3 rating for
banks that exhibit some degree of concern in one or more
areas; a rating of 4 or 5 indicates more serious problems.
While the CAMELS ratings assigned to individual banks
are confidential, comparison of CAMELS ratings
across all banks over time may provide useful
information about the condition of U.S. banks as
a whole. The percentage of banks rated below
CAMELS 1 or 2 was substantially higher during
1991 (a recession year) than during recent reces-
sionary quarters. In the first quarter of 1991, 17.8
percent of banks had CAMELS ratings of 3 and
10.1 percent had ratings of 4 or 5. In the first
quarter of 2002, in contrast, 6.2 percent of banks
had CAMELS ratings of 3 and 1.5 percent had
ratings of 4 or 5.
The CAMELS rating of a bank at a given point
in time reflects the results of an examination con-
ducted sometime during the prior 18 months. The
figure indicates the extent to which examiners
identified problems during exams conducted in
each quarter since 1987. For each quarter, the
denominator of the ratio 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 begun during that quarter. The numerator is
the number of these banks that received CAMELS ratings
of 3, 4, or 5 on those examinations begun during that
quarter. The shaded areas are recession periods.
CAMELS ratings downgrades from 1 or 2 to a 3, 4, or
5 have been much less frequent since March 2001, the
peak of the last expansion, than during the late 1980s and
early 1990s. The percentage of banks downgraded in a
quarter rose to just over 10 percent during the recession of
the early 1990s, peaking at about 11 percent in the fourth
quarter of 1990. In contrast, the downgrade percentage was
just above 2 percent during 2001 and the first quarter of
2002. By this indicator, most banks continue to be in sound
condition. The conclusion is unchanged if we weight the
banks examined in each quarter according to their assets.
Thus, the percentage of banks currently rated below
CAMELS 2 is low by standards of recent years—and
especially low by standards of the prior recession period.
—R. Alton Gilbert and Sarosh R. Khan
CAMELS Downgrades
0
2
4
6
8
10
12
14
Q1-1987
P
e
r
c
e
n
t
Quarterly NBER Periods of Recession
CAMELS Downgrade from 1, 2 to 3, 4, or 5
SOURCE: Federal Reserve System.
Q1-1988
Q1-1989
Q1-1990
Q1-1991
Q1-1992
Q1-1993
Q1-1994
Q1-1995
Q1-1996
Q1-1997
Q1-1998
Q1-1999
Q1-2000
Q1-2001
Q1-2002

The condition of banks: what are examiners finding?

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The condition of banks: what are examiners finding?

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