CH3 - EWI CAMEL

[enjofaes]

I read from the OCC 2012 that pending regulatory action or CAMELS component can be an early warning indicator. It's never going to be a question on the exam I guess but still felt that I needed to share it

CAMELS is an international rating system used by regulatory bodies to evaluate the soundness of financial institutions, particularly banks, on a uniform basis. It is an acronym that stands for:

1. C - Capital Adequacy: The bank's capital in relation to its risk level.
2. A - Asset Quality: The quality and diversification of the bank's loans and investments.
3. M - Management Quality: The competence, experience, and performance of the bank's management.
4. E - Earnings: The bank's profitability, stability, and growth trend of earnings.
5. L - Liquidity: The bank's ability to fund assets and meet obligations as they come due.
6. S - Sensitivity to Market Risk: The bank's vulnerability to changes in market conditions, such as interest rate changes.

So, you could think of a well-run bank as a CAMEL, steadily moving through the desert (market conditions).

• It's carrying an appropriate load (Capital Adequacy),
• steps carefully (Asset Quality),
• is well-guided (Management),
• eats regularly (Earnings),
• drinks enough water (Liquidity),
• and is not overly affected by the changing weather (Sensitivity to Market Risk).

 

[enjofaes]

Same for MERIT:

The M.E.R.I.T framework stands for:

1. M – Measures: The specific metrics or indicators that are monitored to identify potential risks early.
2. E – Escalation: The process of increasing attention or concern when certain risks are identified.
3. R – Reporting: Regularly communicating the status, findings, and implications of the measures to relevant parties.
4. I – Integrated Systems: The ability to share and analyze data across the organization, helping to effectively monitor measures.
5. T – Thresholds (Green/Yellow/Red): A 'stoplight' system where various levels of risk or issue severity are classified as green (no issue), yellow (potential issue), and red (critical issue).

To remember the M.E.R.I.T system, consider this analogy:

Imagine a hill (like a mountain, connecting to "M" in MERIT). Climbing the hill requires constant Measurement of your progress (M). As the climb gets tough, you may need to Escalate the situation and ask for help (E). You keep your team Reported on your status (R). Everyone's climbing gear is Integrated, ensuring everyone can handle their part (I). And, you have clear Thresholds for when to take a break (green), when to be cautious (yellow), and when to stop altogether (red) (T). This gives you the MERIT of a well-planned, successful climb.