Banks and Camels
Introduction: What does a bank have to do with the camels? A lot! It could be the deciding factor in a bank to be allowed to function, or even shut. The higher the bank raises the camels, the more likely you are doing! This is a score for a bank would do well to keep down!
In fact, the camel is the acronym for the six factors that form the basis of a rating system of international bank. These six factors are: capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risks.
Under this rating system, banks are classified as to the quality of these six factors. The strength of these six factors to determine the overall strength of the Bank. The quality and strength of these six factors underlining the strength of the Bank and how you can take care of itself against market forces. It also allows regulators to focus on banks that are not doing well and paying special attention to them.
Regulatory authorities to consider not only the Bank’s financial statements, but also carry out spot checks and then the rate of the Bank. The rating system is based on a scale of 1 to 5 with 1 being the highest score and 5 the lowest. Banks are regarded as grade 1 in the top bracket in terms of its financial solvency, and the score 5 is considered that at the bottom of the ladder.
Objective: The purpose of this rating system is to examine the financial and other Bank, and alert senior management of the Bank to take timely measures to remedy any deficiencies and allow the Bank to the bottom of the slide pile.
Camels rating is conducted with reference to the following factors:
1) Capital Adequacy: Each bank is expected to have sufficient capital to meet their needs in relation to the risk in performing their operations. The proportion of the capital of a bank in relation to its risk weighted assets must meet the minimum requirements.
Basle II Accords, brokered by the Bank for International Settlements, Basle, Switzerland, provides a capital adequacy ratio of at least 8%. This is the minimum necessary, and banks are recommended to have a comfortable capital adequacy ratio, which is responsible for any untoward incidents.
The need for sufficient capital cannot be overestimated. It is the basis on which the Bank is, and its strength can be measured by the strength of its base. The Bank building draws its strength and relief of the capital base.
Consistent with the need for a strong capital base of banks, the Bank for International Settlements has exited with an elaborate set of recommendations that are expected to launch, which is a dynamic and responsive to the Bank’s counter threat to their well-being of the elements of risk. To this end, the weights assigned to each type of risk facing the Bank in its daily operations and, consequently, the amount of capital required to address this risk is developed.
2) Asset Quality: Asset Quality The term refers to the quality of the Bank’s lending portfolio. Loan is one of the main activities of a commercial bank, the welfare of the Bank is dictated largely by the quality of its loan portfolio. A good loan portfolio through a steady income to the Bank, besides adding to the bank’s solvency and hence its classification.
To ensure the quality of assets, the Bank has to follow a good system of loan guarantees compliance with all related standards. Some of the parameters for judging the soundness of a loan account are the components of security, liquidity, the goal, profitability, etc.
In the process of lending, the Bank must take all reasonable precautions to ensure the safety of their funds. The assessment of credit proposals should focus on the technical feasibility and financial viability of the project, or company account. The purpose of the loan must be commensurate with the productive activities that are related to the implementation of the capital. The result of this application should be generating a revenue stream for repayment of the loan. The quality of loan assets, largely determines the viability of a bank run as a concern.
3) Management: For management means the art and science of achieving the objectives of the institution by deploying all necessary resources properly. Management includes planning, organizing, staffing, directing, and controlling functions.
Planning refers to the development of the project to the goals and objectives of the Bank, and set the path to reach them. Planning is an activity that encompasses all that touches on all the Bank’s activities.
The organization is the next step after the planning, and relates to the implementation of necessary infrastructure, including human resources to achieve institutional objectives of the Bank.
Staffing, as the term suggests, is to fill various positions in the Bank with the right people.
Management by channeling the energies of the employees towards the achievement of institutional objectives of the Bank, by motivating the employees with the rewards, both monetary and in terms of their career goals.
Control is a management function that involves establishing a performance standard for employees and take appropriate action on the principle of reward and punishment.
A Bank that scores high in this area, management is obligated to reach a good performance and also contribute to the soundness of the banking sector as a whole.
4) Revenue: The revenue of a bank refers to the net profits made by it. Profit is the difference between revenue and expenditure. The main sources of income for the Bank is the interest earned on loans and other income from activities such as general banking, remittances, invoices, etc. Other than these, related to the activities undertaken by the Bank as bancassurance, etc. also contribute to the Bank kitty.
The expenses of the Bank may, among other things, salaries, wages, general administrative expenses, rents, fees, taxes, etc. The net surplus remaining after taking care of all expenses is the net profit.
A healthy bank should be able to generate decent profits and regularly maintained, and their investors, in good health.
5) Liquidity: Liquidity is the ease with which an asset can be encased from the bank in times of need, or their fair value. Is that the quality of an asset that allows a bank to respond to any financial situation that requires urgent injection of cash or money worth. This quality of the assets of the Bank ensures that one is faced with the minimum stress in dealing with such situations.
In addition to a financial crisis and crisis situations such as, liquidity is also required to meet regular financial obligations of the Bank, without dipping into its reserves. Marks the ability of the Bank’s liquidity expected and unexpected financial problems and issues.
6) Sensitivity to Market Risk: Market forces are a major reason for changes in the fate of companies. You can push the movement in favor of the fortune of a bank, while the poor can be sent to the Bank of packaging cleanliness. Market forces generally refer to changes in interest rates, exchange rates, commodity prices and stock prices. In addition to these changes are interrelated in a complex and unrest in an area are often accompanied with the same in other areas.
A sound bank is expected to have sound risk management practices in place to care for known and unknown risks. The match of assets and liabilities of the Bank must be consistent with the principles of risk management.
Conclusion: The current banking crisis, which is quite unprecedented, stresses the importance of regulatory issues and the effects of incompetence in this area.
Camels, like a rating system to evaluate the soundness of banks is a very useful tool that can help in mitigating the risks and conditions that lead to bank failures.
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