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    How Regulators Monitor Banks

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    Ehsanul Hamid
    Regulators monitor banks through on-site examinations at least once a year and periodic reviews of data submitted by banks. They assess compliance with regulations and financial condition to detect deficiencies early to prevent bank failure. Regulators use the CAMELS rating system to evaluate banks across six characteristics: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity. Each characteristic receives a 1-5 rating, with a composite average determining if a bank is considered a "problem bank." While useful, CAMELS ratings have limitations as they evaluate past performance rather than predict the future, so subjective judgment is also needed.

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    How Regulators Monitor Banks

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    Ehsanul Hamid
    154 views4 pages
    Regulators monitor banks through on-site examinations at least once a year and periodic reviews of data submitted by banks. They assess compliance with regulations and financial condition to detect deficiencies early to prevent bank failure. Regulators use the CAMELS rating system to evaluate banks across six characteristics: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity. Each characteristic receives a 1-5 rating, with a composite average determining if a bank is considered a "problem bank." While useful, CAMELS ratings have limitations as they evaluate past performance rather than predict the future, so subjective judgment is also needed.

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    Regulators monitor banks through on-site examinations at least once a year and periodic reviews of data submitted by banks. They assess compliance with regulations and financial condition to detect deficiencies early to prevent bank failure. Regulators use the CAMELS rating system to evaluate banks across six characteristics: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity. Each characteristic receives a 1-5 rating, with a composite average determining if a bank is considered a "problem bank." While useful, CAMELS ratings have limitations as they evaluate past performance rather than predict the future, so subjective judgment is also needed.

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    154 views4 pages

    How Regulators Monitor Banks

    Uploaded by

    Ehsanul Hamid
    Regulators monitor banks through on-site examinations at least once a year and periodic reviews of data submitted by banks. They assess compliance with regulations and financial condition to detect deficiencies early to prevent bank failure. Regulators use the CAMELS rating system to evaluate banks across six characteristics: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity. Each characteristic receives a 1-5 rating, with a composite average determining if a bank is considered a "problem bank." While useful, CAMELS ratings have limitations as they evaluate past performance rather than predict the future, so subjective judgment is also needed.

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    of 4

    How regulators monitor banks

    Bank regulators typically conduct an on-site examination of each commercial bank at least once a year.
    During the examinations, regulators assess the banks compliance with existing regulations and its
    financial condition. In addition to on-site examinations, regulators periodically monitor commercial
    banks with computerized monitors systems, based 0n data provided by the banks on a quarterly basis..
    Regulators monitor banks to detect any serious deficiencies that might develop so that they can correct
    the deficiency before the bank fails. The more failures they can prevent, the more confidence the public
    will have in the banking industry. The evaluation approach described here is used by the FDIC, the
    federal reserve, and the comptroller of the currency.

    The single most common cause of bank failure is poor management. Unfortunately, no reliable measure
    of poor management exists. Therefore, the regulators rate banks on the basis of six characteristics,
    which together comprise the CAMELS ratings so named for the acronym that identifies the six
    characteristics.

    • Capital adequacy.

    • Asset quality

    •Management

    •Earnings

    •Liquidity

    •Sensitivity

    Each of the CAMELS characteristics is rated on a 1 to 5 scale, with 1 indicating outstanding and 5 very
    poor. A composite rating is determined as the mean rating of the six characteristics. Banks with a
    composite rating of 4.0 or higher are considered to be problem banks. They are closely monitored
    because their risk level is perceived as very high.

    Capital Adequacy

    Because adequate bank capital is thought to reduce a banks risk, regulators determine the capital ratio.
    Regulators have become increasingly concerned that some banks do not hold enough capital and have
    increased capital requirements.

    Asset Quality

    Each bank makes its own decisions as to how deposited funds should be allocated and these decisions
    determine its level of credit risk. Regulators therefore evaluate the quality of the banks assets, including
    its loan and its securities.

    The Fed considers the 5 Cs to assess the quality of the loans extended by Skyler bank, which it is
    examining.

    • Capacity- the borrowers ability


    • Collateral- the quality of the assets that back the loan.

    • Condition- the circumstances that led to the need for funds

    • Capital- the difference between the value of the borrowers assets and its liabilities.

    • Character- the borrowers willingness to repay loans, as measured by its payment history on the loan
    and credit report.

    Rating an asset portfolio can be difficult, however as the following example illustrates

    Each loan has specific provisions as to how it is secured by the borrower’s assets; some of the loans have
    short-term maturities while others are for longer terms. Imagine the task of assigning a rating to this
    banks asset quality. Even if all the banks loan recipients are current on their loan repayment schedules
    this does not gurantee that the banks asset quality deserves a high rating. The economic conditions
    existing during the period of prompt loan repayment may not persist in the future. Thus, an appropriate
    examination of the banks asset portfolio should incorporate the portfolios exposure to potential events.
    The reason for the regulatory examinations is not to grade past performance but to detect any problem
    that could cause the bank to fail in the future.

    Management

    Each of the characteristics examined relates to the banks management. In addition regulators
    specifically rate the banks management according to administration skills, ability to comply with existing
    regulations and ability to cope with a changing environment. They also assess the banks internal control
    systems which may indicate how well the banks management would detect its own financial problems.
    This evaluation is clearly subjective.

    Earnings

    Although the CAMELS ratings are mostly concerned with risk, earnings are very important. Banks fail
    when their earnings become consistently negative. A profitability ratio commonly used to evaluate
    banks is return on assets, (ROA), defined as earnings after texes divided by assets.

    Liquidity

    Ome banks commonly obtain funds from some outside sources but regulations would perfect that banks
    not consistently rely on these sources.

    Sensitivity

    Regulators also assess the degree to which a bank might be exposed to adverse financial market
    conditions. Two banks could be rated similarly in terms of recent earnings, liquidity and other
    characteristics and yet one bank may be much more sensitive than the other to financial market
    conditions. Banks that are more sensitive to rising interest rates are more likely to experience financial
    problems.

    Limitations of the CAMELS rating SYSTEM

    The CAMELS rating system is essentially a screaming device. Because there are so many banks regulators
    do not have the resources to closely monitor each bank on a frequent basis. The rating system edentifies
    what are believed to be problem banks. Over time, some problem banks improve and are removed from
    the problem list while others may deteriorate further and ultimately fail. Still other banks are added to
    the problem list.

    Although examination by regulators may help detect problems experienced by some banks in time to
    save them many problems still go unnoticed and by the time they are detected it may be too late to find
    a remedy. Because financial ratios measure current or past performance rather than future performance
    they do not always detect problems in time to correct them. Thus although an analysis of financial ratios
    can be useful the task of assessing a bank is as much an art as it is a science subjective opinion must
    complement objective measurement to provide the best possible evaluation of a bank.

    Any system used to detect financial problems may err in one of two ways. It may classify a bank as safe
    when in fact it is failing or as very when in fact it is safe. The first type of mistake is more costly because
    some failing banks are not identified in time to help them. However if they did, many more banks would
    be on the problem list requiring close supervision, and regulators would have to spread their limited
    resources too thin.

    2.1 Vision, Mission, Goals and Objective of CBL:

    Vision:

    To be the leading bank in the country with best practices and highest
    social commitment.

    Mission

     To contribute to the socioeconomic development of the country


     To attain highest level of customer satisfaction through extension
    of services by dedicated and motivated team professionals
     To maintain continuous growth of market share ensuring quality
     To maximize bank's profit ensuring its steady growth
     To maintain the high moral and ethical standards
     To ensure participative management system and empowerment of
    human resources
     To nurture an enabling environment where innovativeness and
    performance is rewarded

    Goals and objectives of The City Bank Limited

     To build up strong pillar of capital


     To promote trade, commerce and industry
     To discover strategies for achieving systematic growth.
     To improve and broaden the range of product and services.
     To develop human resource by increasing employment opportunities.
     To enhance asset of shareholders.
     To offer standard financial services to the people.
     To create congenial atmosphere so that the client becomes interested to deal with The City Bank
    Limited.
     To keep business morality.
     To develop welfare oriented banking service.
     To offer on the business of discounting and dealing in exchange of specie and securities and all kinds
    of mercantile banking.
     To prove for safe-deposit vaults and the safe custody of valuable of all kinds.

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