Why CAMEL failed to recognize the weakness of banks?

Many analysts or bank inspectors use the CAMEL for analyzing banks and not knowing the disadvantages of the model. Here is an expose of the potential loopholes and where the EAGLES benchmark may excel.

Demise of CAMEL?

In the CAMEL, analysts assess five key aspects of the operations of a financial institution – Capital, Assets, Management, Earnings and Liquidity – rating them on a scale of 1 to 5. An overall rating of 1 is best while a rating of 5 implies a bank being laden with existing or potential problems.

However, the CAMEL approach suffers from indeterminacy, subjectivity and even inconsistency. As most bank analysts and examiners will acknowledge, there are instances when an examination of the accounting records cannot decide whether to give an average or below average score. The ‘good’ and ‘bad’ indicators are easy to spot, but not so the ‘in-betweens’. This is a problem of indeterminacy. But when bank inspectors are forced to make a judgement, then it leads to the second problem of subjectivity. And where human minds are at work, they come with differing levels of expectations and perspectives.

So in is of little wonder why CAMEL has failed to recognize weaknesses in banks before the crisis.

Enter the EAGLES

The EAGLES is able to measure and compare banks performance in a more determinate, objective and consistent manner. The name is derived from the key success factors confronting banks today, i.e. Earning ability, Asset quality, Growth, Liquidity, Equity and Strategy. This approach has been pioneered by the writer and has gained creditability among the banking community and fund management industry in Asia, for competitor analysis and investment planning respectively. It also predicted the Asian financial crisis in the 1980s when the writer was “banned” from data collection in many countries.

Earning ability is shown by three noteworthy indicators – Return on Assets (ROA), Return on Shareholders’ Fund (ROSF) and Income/Overheads ratio (IOR). The importance of the IOR is usually not well understood. The main point lies in that Income depends on external market forces, while Overheads is highly influenced by internal staffing. So the bank must know how to adjust the staffing according to market demand for its products and services.

Asset quality is best assessed by on-site inspection of the bank’s loan portfolio.If this is not possible, the asset quality can be measured by the level of bad debt provisions, that is, bad and doubtful debts (BDD) as a percentage of total loans. A conservative approach will dictate that the quantum of provision to err on the high side rather low.

Growth rates of loans and core deposits are the most important indicators of a how a bank wants to position itself in the marketplace. A high growth loan book without a corresponding growth in deposit base signifies an intention to increase interest margins. A higher deposit growth without a corresponding growth in loans means that the bank suffers from low interest margins. For some banks lower interest margins could hamper overall profitability.

Liquidity can be described as the ability of a bank to have sufficient funds to meet cash demands for loans deposit withdrawals and operating expenses. For this reason, a balance should be found between the amount of deposits garnered and the quantum of loans extended. The indicator is the deposit-to-loan ratio.

Equity level and capital adequacy have profound impact upon the bank. Not only is there an international guideline (Basle II) that stipulates a bank must have a minimum capital equivalent to 8% of risk adjusted asset. Many banks are restricted to open additional branches unless they meet minimum capital requirements.

The effective management of a bank strategy is indicated by the strategic response quotient (SRQ). It is an intriguing ratio because it assesses management’s ability to lend, to garner deposits, obtain fee-based income and to manage the operating cost. As to what is an appropriate balance of the three core banking activities will depend on the bank’s strategy. The SRQ is obtained by dividing the interest margin by net operating cost (that is, total operating cost less fee income). The higher figure the better combined with excellent risk controls.

(Excerpt from “Soar on wings of Eagles” Bankers Journal Malaysia, Oct/Nov

Comments

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john

can you please send me the EAGLES model? my email id is mandheerarora@gmail.com

thanks in advance.

Touche. Sound arguments. Keep up the good effort.

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i am pursuing MBA in financial markets from ITM Institute of financial markets, Navi Mumbai & i need it as a part of my project for valuing banking sector.

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Hej, John,

My name is Jelena and I am writting my master about analysing the banks in Lithuania.
I would like to head your article, as the topic is interesting and will be useful for my thesis.

Thanks in advance,
Jelena

Hi Jelena

The article has been sent to you by email.
Please confirm that you have received the article.

Dr. John

hi John

my name is adis and i'm currently doing my thesis about banks performance in Indonesia. however, i find a difficulty to find related articles about EAGLES.

Thus, could u help me to send some articles about EAGLES?

thx!

Hi Adis

Kindly send me an email to john@leadershipcorp.com, otherwise I wont know how to send the articles to you.
Also let me know in which university you are studying.
Hope to hear from you soon.
Dr. John

Hello sir. I am a finance student. I have a project to appraise a bank's performance. I find your approach of EAGLE model more convenient so want more info on that. I will be obliged to get a response from you.

Hi Sarojini
Kindly send your email address to john@leadershipcorp.com.
so that I am able to send you some articles for your research.
Dr John

Hello sir. My e-mail id is sarojinimfc@gmail.com. It will be my pleasure to have your articles for my project.

hi john
i am searching for materials for masters thesis on banks performance analysis. as i went through your article i felt its quite interesting matter to dig out. i want to research about the EAGLES framework against the CAMEL deeply. so i would be grateful if u kindly send me the materials on EAGLES at my email.
thanking you

Please provide your email address to john@leadershipcorp.com so that I can send you the articles.

Hello Sir

I am from nepal and doing my master degree thesis on financial performance of nepalese bank using camel analysis.
while searching for an article i came to know about eagle from your blog.
could you send me some article on both CAMEL and EAGLE.
It would be kind of you.
My email id is aquarious27282@gmail.com

Thank you
Samundra

Hi Samudra
Thank you for your clear inquiry.
The EAGLES article shall reach you by today.
Dr John

hello John,

I would like to apply EAGLES model in my research since it looks more effective compare to CAMEL model. I wish to read the EAGLES article to increase my understanding related to this model. Here, I sent u my email; nufar_07@yahoo.com and my special thanks on your kindness.

Warmest Regards:
Nurul Farhana Mazlan

Hi Nur

The articles have been sent to your email address.
Please confirmed receipt.

Thanks
DrJ

hello John,

I would like to apply EAGLES model in my research. Here I need articles and journals about EAGLES analysis. I want to know how to use EAGLES analysis to measure the financial performance of banks and its effect on returns and stock prices.. Here, I sent u my email: feryfajardwiprasetyo@rocketmail.com and my special thanks on your kindness.

Warmest Regards:
FERY FAJAR DWI P

To: Fery Fajar
From: Dr John

The articles have been sent to you. Please confirm receipt.
We are most happy to assist in your banking research.
Let us know if there is anything else you need to know about banking.

To: Fery Fajar
From: Dr John

The articles have been sent to you. Please confirm receipt.
We are most happy to assist in your banking research.
Let us know if there is anything else you need to know about banking.

I would like to ask Mr. John Vong, I want to know exactly what the heck EAGLES analytical advantages compared with CAMEL analysis?
Thanks before..

To: Fery
From: Dr John

In response to your question, the disadvantages of the CAMEL are as follows:

The CAMEL approach suffers from indeterminacy, subjectivity and even inconsistency.
For example, bank analysts and examiners will acknowledge, there are instances when an examination of the accounting records cannot decide whether to give an average or below average score. The ‘good’ and ‘bad’ indicators are easy to spot, but not so the ‘in-betweens’.
This is a problem of indeterminacy. But when bank inspectors are forced to make a judgement, then it leads to the second problem of subjectivity. And where human minds are at work, they come with differing levels of expectations and perspectives, and therefore inconsistency.

So in is of little wonder why CAMEL has failed to recognize weaknesses in banks before the crisis.

HOWEVER the advantages of EAGLES are that:

The EAGLES is able to measure and compare banks performance in a more determinate, objective and consistent manner. The name is derived from the key success factors confronting banks today, i.e. Earning ability, Asset quality, Growth, Liquidity, Equity and Strategy. This approach has been pioneered by the writer and has gained creditability among the banking community and fund management industry in Asia, for competitor analysis and investment planning respectively. It also predicted the Asian financial crisis in the 1980s when the writer was “banned” from data collection in many countries.

I also want to ask Sir John Vong, how the correct formula for calculating the indicators of each component of the analysis EAGLES . Start from aspects of Earning Ability to Strategic Management.

Hello Dr. John ..
I'm a accounting student from Indonesia .. now i take scription about performance financial banking in indonesia ..
cand you send me some article or journal about eagles methode because in Indonesia very minus article about EAGLES..

I would be very much grateful if you could email the articles to me..
My email address is dwee_kassi46@yahoo.com

Thank you for your helping Dr. John

i need help on eagles and camel rating systems iam doing Ms in finance and wish to do research using this techniques kindly send me relating articles my id is sanajavaid70@gmail.com

Dear sir,

currently, i am doing research on CAMELS analysis for the fulfillment of Master Degree course of study in Nepal under Tribhuvan University Guidance. i became really curious when i read your blog and comments. Now, i suddenly changed my mind to do more research on EAGLE and CAMELS analysis.

it would be great help for me, if you provide me the articles about CAMELS and EAGLE analysis that you have written.

i look forward your positive response

Arjun Thapa
Nepal

Dear Sir,

as i already mentioned my desire to read more about CAMEL and EAGLES analysis. But i forgot to write my Email ID.

please kindly send me your articles on below these email address

arjun.thapa5@gmail.com, arjun_thapa815@yahoo.com

hopping to get positive response

thank you,

Arjun Thapa
Nepal

Hi John,

I'm currently doing a research on the potential of bank mergers in Malaysia and doing some reading on bank performance. I noticed the EAGLES framework mentioned in your blog and would like to explore this method/model further in my research. Appreciate if you could send me some relevant articles that will be of much help to me. My e-mail id is mahadhevan.g@gmail.com.

Thank you in advance.

Best Regards,
Mahadhevan.

Hi, John
I am Kinnari.
I am Ph. D. Student.... My Research topic is Comparative study of financial performance of Public sector Banks... I want to use EAGLES Model for this purpose.... please help me to understand different ratios under this Model and their Interpretation
I could not able to find articles on EAGLES other than this one.... Will you please provide any link or email me the same....
My Email Id is kdd9339@gmail.com...
Thank you.