CAMELS System Used to Rate Bank Performance

The Central Bank of Iran has ranked banks based on 40 criteria and is using the results to control their operations, the CBI deputy governor for supervision said. "We have categorized banks based on more than 40 indicators using the CAMELS model. The model has been updated to this year to include regulatory compliance criteria to the previous model. We have a transparent classification of banks solely for the CBI use to set permissible growth limits for banks,” Abouzar Soroush was quoted as saying by IBENA, during the 30th Conference on Monetary and Exchange Policies" CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity. According to Investopedia, supervisory authorities assign each bank a score on a scale for each factor. A rating of 1 is considered the best, and a rating of 5 is considered the worst. The system can be used to more easily identify banks that are weak and pose a risk so that those banks can resolve their issues. So, banks that are given an average score of less than 2 are considered to be higher-quality institutions, and those with scores greater than 3 are considered to be less-than-satisfactory institutions. If a bank has a higher score, it is more likely to be subject to more examinations. Soroush emphasized the need for banks to adopt a business model that aligns with their nature. He suggested that banks should either be fee-oriented, focus on bridging the gap between deposit and lending rates, or utilize an optimal combination of these two approaches. “If the objective is to reduce the gap between lending and deposit rates…it is essential to allow for the revision of bank fees. So far banks are prohibited by law from charging more than the real cost of the services they provide.” Highlighting the importance of clarifying the definition of banking system reforms, he stated that a precise definition is necessary to redefine the role of the banking industry in financing the economy and to determine the quality of bank assets. He added that the existing imbalances in the economy are also reflected in the imbalances within the banking network. “Considering the crucial role of banks in the economy, the stability of the banking sector is indeed important. Even the slightest change in liquidity growth or control manifests itself in the availability of financial resources for businesses." Banks must have clear and transparent objectives and expectations. "By controlling liquidity growth through bank balance sheets, they will not be able to provide facilities as they did in the past…This adds to pressures on banks and entangles them in financing schemes and projects. Therefore, one of the tasks CBI has undertaken is to estimate the precise lending capacity of the banking network." Regarding the shift in the supervisory approach to the performance of lenders, he said that with recent initiatives the regulator is moving from a person-centric approach to a system-centric approach. “Some measures were taken by the CBI in the past. Better coordination between the supervisory affairs and innovative technologies sector of the CBI has started.”