CAMELS ratings are more than report cards. They are an assessment of risk, bringing attention to weaknesses that are hurting the health and success of an institution.
Most of the elements of a CAMELS rating (capital adequacy, asset quality, earnings, liquidity, and sensitivity to market risk) focus specifically on financial metrics and risks, assessing the financial health of the institution. These areas are critically important, yet dollar signs are not the only measure of viability.
That’s why the M is CAMELS is dedicated to management.
How important is management? According to the FDIC Risk Management Manual of Examination Policies, it’s “the single most important element in the successful operation of a bank.”
Management is responsible for setting and implementing the strategic decisions and plans that ultimately determine capital adequacy, asset quality, earnings, liquidity, and sensitivity to market risk. It’s the lynchpin that unifies the whole operation.
Who Is Management?
When CAMELS refers to management, it’s not talking about the managers responsible for day-to-day operations. It’s talking about the board of directors and executive officers.
These two groups complement each other. The board, elected by the shareholders, is the source of all authority and responsibility. It makes the big decisions, including policies and objectives. Executive officers are appointed by the board of directors. These officers are charged with implementing the board’s policies and objectives.
Earning a good CAMELS rating for management is all about risk management. A financial institution needs to demonstrate the ability of the board and management to identify, measure, monitor, and control the risks of the FI’s activities while ensuring sure its safe, sound, and efficient operation and compliance with laws and regulations.
Regulators are looking for active management oversight, competent personnel, adequate policies and procedures, an ongoing audit and internal controls program, and effective systems for risk monitoring and management. They want to see a board and management that knows how to plan for and respond to the risks posed by changing business conditions or the introduction of new products or services. They want to see that appropriate policies are monitored and followed and that controls remain accurate, updated, and effective. Management should be responsive to auditor and examiner recommendations. Succession planning and training are critical as are transparency and ethical behavior.
Management structures should be appropriate for the FI’s size, complexity, and risk profile.