A CAMEL Rating's Shelf Life

23 Pages Posted: 3 Nov 2008

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Jeffery Gunther

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: December 31, 1995

Abstract

How quickly do the CAMEL ratings regulators assign to banks during on-site examinations become "stale"? One measure of the information content of CAMEL ratings is their ability to discriminate between banks that will fail and those that will survive. To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and Jeffery Gunther use as a benchmark an off-site monitoring system based on publicly available accounting data. Their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings "older" than two quarters causes the overall accuracy of CAMEL ratings to fall substantially below that of off-site monitoring systems. The higher predictive accuracy of off-site systems derives from both their timeliness-an updated off-site rating is available for every bank in every quarter-and the accuracy of the financial data on which they are based. Cole and Gunther conclude that off-site monitoring systems should continue to play a prominent role in the supervisory process, as a complement to on-site examinations.

Keywords: Bank, Bank Failure, CAMEL, Commercial Bank, Offsite Supervision, Regulation

JEL Classification: G21, G28

Suggested Citation

Cole, Rebel A. and Gunther, Jeffery, A CAMEL Rating's Shelf Life (December 31, 1995). Available at SSRN: https://ssrn.com/abstract=1293504 or http://dx.doi.org/10.2139/ssrn.1293504

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Jeffery Gunther

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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