CAMELS Ratings and Their Information Content (WP-2021-01)

Abstract

In this paper, we examine CAMELS ratings, their information content, and their determinants over the period from 1984 to 2020. We find composite CAMELS risk ratings and the individual Management component rating have significant predictive power for future bank performance and risk measures relevant to banking regulators and supervisors. We also show that when the proportion of high-risk composite CAMELS ratings in the banking sector increases, this leads to a material contraction in bank loans and an increase in the unemployment rate in subsequent quarters.

Authors

Lewis Gaul, Jonathan Jones