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Thursday, October 04, 2007

Everything You Always Wanted Not To Know About CAMELS

Admittedly, when the banking world is being properly run, the average person should not have to worry about CAMELS. The camels addressed here are not dromedaries, but safety and soundness ratings given to chartered institutions at examinations. A 1 and a 2 are very good, a 3 is cause for improvement, and a 4 or a 5 means that an institution is "troubled". If your bank is troubled you may find yourself troubled!

The bad part is that you never get to know the official CAMELS rating of a bank. Agencies don't publicize the facts about troubled banks because doing so would probably tip the bank over into insolvency with a bank run. Perhaps realizing the unfairness, the FDIC publishes this little list of bank ratings firms that try to give the equivalent to the public.

As the Failed Bank List once again becomes a rapidly updated item (today's head on the wall was Miami Valley Bank of Ohio), CAMELS and FDIC insurance limits should be topics on your mind. I guess you can ignore CAMELS if you pay attention to insurance limits, but if you don't, you need to be hobbling up your CAMELS so that your money doesn't wander off in the middle of the night. For quite some time now, the FDIC has been signaling that depositors who are over insurance limits at failed institutions can now expect to lose money.

The FDIC provides an online deposit insurance calculator here. If you have less than $100,000 total in accounts at an institution (including accrued interest), you are insured. That doesn't necessarily mean that you will get all your funds back immediately, though. IRAs and some other retirement accounts are separately covered up to a limit of $250,000. Joint accounts are subject to yet another limit. This brochure about FDIC insurance might be helpful. If you have more than $100,000 in a bank, I strongly recommend that you review the more detailed brochure here. Don't rely on what bank employees may have told you and don't assume that such employees will always have realized the significance of what you were doing with your accounts. The way the accounts are titled and who is authorized to withdraw funds can change your total amounts of deposit insurance.

Probably the easiest way to check up on CAMELS equivalents is at Bankrate.com. You can search for institutions at which you have money to see their last rating, or you can search for all the badly rated banks and rejoice if yours is not on the list. Note that the Bankrate.com's stars are the reverse of CAMELS, so that one star is equivalent to CAMELS' 5. Once you have found your bank, you can choose to look at their financials or the memorandum, which will give you further information. This is the memorandum on Miami Valley Bank, and here are a few choice excerpts:
For the six months ended June 30, 2007, the bank recorded a net loss of $11,169.00 thousand which represented a return on average assets (ROA) of -14.80%.
...
The bank reveals, as previously stated, questionable asset quality. That conclusion incorporates our analysis of data depicting regional economic conditions as well as our computations of a highly problematic June 30, 2007 nonperforming asset ratio; below normal reserve coverage for nonperforming loans; and apparently acceptable quality, or no greater than average, commercial real estate and construction loans, two categories that can intensify credit risk.
...
Excessive loan yield may be an indicator of existing or future problems. Our loan review indicates that the bank has assumed a possibly less than prudent position between credit risk and financial reward.
...
Based upon the bank's present balance sheet, changes in the value of the current level of securities reported as "Available-for-Sale" are almost certain to have a substantial impact upon future net worth of the bank.
Troubled banks quite often recover. For more perspective, see this FDIC paper. Low reserves, high yield and risky loans, questionable securities and losing money doomed Miami Valley Bank. According to the FDIC press release:
At the time of closing, Miami Valley had approximately $14 million in 269 deposit accounts that exceeded the federal deposit insurance limit. While these customers will have access to their insured deposits, they will become creditors of the receivership for the amount of their uninsured funds.
In other words, they may get some of their money back, but they are also going to lose some. You don't want to find yourself in this boat. Netbank inflicted far more pain upon uninsured depositors. So far the FDIC is giving uninsured depositors 50% of their funds back. That's a nasty haircut.

Hunting high deposit rates can often land an unwary depositor in a heap of CAMELS dung in conditions like this. Be aware that banks which are offering exceptionally high rates do so for a reason other than profound benevolence, and also be aware that such banks will have large amounts of jumbo uninsured deposits that can leave in an instant at a sign of trouble, which can tip a troubled bank over the brink. The funds and corporations that farm this stuff out have access to a lot more information than individual depositors, and when they whisk their funds out, you may find yourself the bagholder.

If you know an older person who may have a lot of money in the bank, you may wish to check with them to ensure that they don't have too much money in any one bank.

This has been a public service message for everyone who likes to keep their money.


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