Component ratings

VI. Study the following notes and prepare an oral presentation

Mrs. Charlotte Ameasbury summons Karl Brewer to her office and asks him to prepare the final part of the CAMEL rating system liquidity, which indicates the ability of the bank to quickly meet its obligations. So, Karl has brought some notes on liquidity he prepared the other day. He also reminds Charlotte of CAMEL ratings: 1= strong; 2 = satisfactory; 3 = fair; 4 = marginal; 5 = unsatisfactory.

The final part of the camel rating system is liquidity, which indicates the ability of a bank to quickly meet its obligations.

· It is important to remember that for a bank to properly manage its liquidity, it must be able to meet its obligations without a loss.

- Banks must have available liquid assets which can quickly be turned into cash, or they must be able to raise funds on very short notice to meet an obligation;

- Managing liquidity involves both sides of the balance sheet, meaning having available back-up sources to raise liquidity quickly.

· Since liquidity involves many factors, no single ratio measures all a supervisor needs to know about liquidity. Several ratios can be indicators as will be discussed.

· As part of an on-site examination, the examiners review how liquidity is managed which includes:

- Are specific policies in place to set liquidity targets and limits to meet statutory requirements and to manage liquidity as set by directors and senior management?

- Are reporting systems and data bases sufficient to give quick and accurate information on a bank's position?

- How much reliance has the bank placed on deposits or other funding which might be withdrawn on very short notice?

· The on-site review is combined with an analysis of various liquidity ratios to determine the trend of liquidity and how it compares to other banks.

Using their judgment in both the on-site examination of how a bank manages its liquidity and from liquidity ratios, liquidity is then rated as sound, satisfactory, fair, marginal, or unsatisfactory.

Karl also presents component ratings. They are:

Rating 1

- strong performance

- significantly higher than average performance

Rating 2

- satisfactory

- average or above average performance

- adequately provides for safe and sound operation

Rating 3

- performance flawed to some degree

- considered fair

- neither satisfactory nor average but is characterized by below average quality

Rating 4

- marginal performance

- significantly below average

- weaknesses could evolve to threaten viability of bank

Rating 5

- unsatisfactory

- critically deficient and needs immediate attention

- such performance could threaten the viability of the institution

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