Bank Ratings in Emerging Asia - Methodology, Information and Technology (EAGLES vs CAMEL)

The CAMEL and EAGLES analysis are now written in greater detail.

Reference:
Vong, J. (et al.) (2015). Bank Ratings in Emerging Asia - Methodology, Information and Technology in Emerging Technologies for Emerging Markets, Springer New York, pg 25 - 35.

(http://www.amazon.com/Emerging-Technologies-Intelligent-Engineering-Info...)

ABSTRACT

Bank rating is as old as bank regulatory authorities. The most common approach to bank rating is on-site examination. The bank supervision authority conducts an audit of physical bank records and documents and other observations. In particular, the on-site examination looks at the bank’s assets, capital structure, management ability and professionalism of the bank practices. A summary rating is assigned based on this examination. This approach was reported in 1974 in a publication of the Federal Reserve Bank of New York. This rating system was called into question the first time during the Asian Financial Crisis of the 1997 that affected South Korea, Thailand, and Indonesia. IMF painfully restructured the South Korean economy. Thai-land suffered a severe outflow of funds and banks collapsed. The entire Indonesian banking system had to be revamped. Then the global financial crisis struck in 2007-2008, where the western world was hit harder that led to the collapse of very established banks such as Lehman Bros and Bear Sterns. This begs the question: why bank ratings did not, or cannot, forewarn imminent failures in the banking system. In 2009, it was reported that banks were usual-ly rated higher if they had greater capitalization, larger assets, and higher re-turn on assets and equity. In 2013, in a most scathing attack on bank ratings, it stated that most failing banks had enjoyed investment status ratings just be-fore they defaulted. This paper revisits the age-old CAMEL model and its derivatives, a more recent EAGLES framework that alerted the Asian Financial Crisis of the 1990s. Based on the experiences of two crises in the last two decades, what lessons did we learned, especially the early warning signals that can be found, contagion effect, information transparency and the availability of technology processes to collect and harness critical information.

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