CAMELS ratings are the result of the Uniform Financial Institutions Rating System, the internal rating system used by regulators for assessing financial institutions on a uniform basis and identifying those institutions requiring special supervisory attention. Regulators assign CAMELS ratings both on a component and composite basis, resulting in a single CAMELS overall rating. When introduced in 1979, the system had five components. A sixth component—sensitivity to market risk—was added in 1996. The regulators that year also added an increased emphasis on an organization’s management of risk.
The six component areas are:
• C—Capital adequacy
• A—Asset quality
• M—Management
• E—Earnings
• L—Liquidity
• S—Sensitivity to market risk
The ratings range from 1 to 5, with 1 being the highest rating (representing the least amount of regulatory concern) and 5 being the lowest. CAMELS ratings are strictly confidential, and may not be disclosed to any party. But only to the top management of the banking company use the rating to prevent a bank run on a bank which has a bad CAMELS rating.