CAMELS Evaluation and Rating System plus Examination of CCAR and CLAR

US bank regulators have continued to enhance their oversight of the major areas of risk to banks. The major risk evaluation and rating programs that have been introduced are CAMELS, CCAR and CLAR. This presentation provides for a thorough review and understanding of these programs. CAMELS is one of the most significant evaluation methodologies for banks employed by US regulators, namely the Federal Reserve Bank, Comptroller of the Currency and Federal Deposit Insurance Corporation. 

CAMELS is the titling of the rating system employed by these regulators with the titling standing for each of the components contained in the evaluation methodology. Specifically, a bank’s condition is evaluated and rated concerning: capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk. The evaluation conducted by this program is intense and quite detailed and based on a bank’s CAMELS evaluation, a bank is given a rating for each CAMELS component as well as an overall composite rating. It is imperative that a bank understands the CAMELS evaluation process, how the evaluation of each component is formulated, how ratings are established, and the impact of a rating on a bank’s present and planned business initiatives. The understanding of CAMELS must exist with executive management, senior business management, as well as with all staff responsible for the management of the elements of each CAMELS component. 

CCAR and CLAR are two other significant evaluation methodologies for banks employed by US regulators to address a bank’s current and forecasted capital and liquidity conditions. They are intended to ensure that a bank has a long-term planning program for both its capital and liquidity requirements. The evaluation incorporates stress testing into its programs for each. Ratings are given for each are given on a pass or fail basis and here also executive management, senior business management as well as with all staff responsible for the management of a bank’s capital, and liquidity understands the CCAR and CLAR evaluation process and its rating system.

With respect to CAMELS, areas covered are:

• Identifying the CAMELS components
• Assessment of capital quality
• Assessment of asset quality
• Assessment of management quality
• Assessment of earnings quality
• Assessment of liquidity quality
• Assessment of sensitivity to market risk quality 

                 1. Particular focus on interest rate risk  

• Component rating methodology

                 1. Rating denotations

                 2. Rating formulation

                 3. Proposed/required actions

• Composite rating methodology

                 1. Rating denotations

                 2. Rating formulation

                 3. Rating implications

With respect to CCAR and CLAR, areas covered are:

• Objectives of CCAR & CLAR
• CCAR &CLAR methodologies & evaluation components
• Bank management considerations
• Evaluation results & consequences 

The US bank business environment has experienced a variety of issues and problems over the years and US regulators are diligent in ensuring that a bank meets a required standard in key operating areas of a bank which, if not met or are considered substandard, may impact the ongoing viability of a bank. The US regulators continue to engage in improving their assessment methodologies and monitoring processes of banks, thereby increasing the level of bank management attention to the subject areas being evaluated. Management responsibility to the subject areas of the CAMELS, CCAR, and CLAR evaluation exists with a bank’s:

• Board of directors
• Executive management
• Senior business management

However, the specific management of each subject area rests with the staff that is charged with the responsibility of meeting and maintaining the standards set by the regulators for each component. This presentation dissects each of the CAMELS, CCAR, and CLAR components in terms of the regulators’ evaluation methodology for each long-term used to assess structural considerations and the quality of management afforded each component. It continues to address the rating process of each component, and the considerations underpinning each rating. Lastly, it addresses the composite rating process of CAMELS and the considerations responsible for underpinning each rating. 

• EVP/SVP – commercial banks
• CFOs – commercial banks
• Controllers– commercial banks
• Treasury managers – commercial banks
• Risk managers – commercial banks
• Compliance managers – commercial banks
• Auditors – commercial banks

Robert Geary is the founder of Greenwich Risk Management Advisory Services "LLC" and services as the principal consultant on many of the firm's consultancy mandates.
Robert has been a banking and finance industry professional for 43 years with 34 years serving in a variety of senior Treasury, financial market, asset management and risk management roles at JP Morgan Chase & Co. For the last 6 years of his career with JP Morgan Chase, Robert had undertaken risk management oversight roles that have included Head of Market, Credit and Operational Risk Management for Chase Asset Management and being Managing Director of Fiduciary Risk Management for the Corporation. During Robert's career he has served on the Board of Directors of Chase Manhattan Overseas Banking Corporation as well as having served on numerous senior committees. Prior to joining Chase, he held positions at Chemical Bank, Chrysler Financial Corporation and National Bank of North America.
Robert holds a BA degree in Economics from Pace University and did graduate studies in finance at New York University Graduate School of Business. He is a Past President of the New York Athletic Club and iscurrently a member of the Executive Advisory Board of St. John's University Department of Accounting and Taxation.