The US Banking sector has transitioned from a severe crisis to acquire good earnings. During a crisis especially during a deep recession, the banking sector had to make clear their risks and possible ways to avert them. The CARMEL rating system acts as a supervisory rating used by the government to assess the banking conditions. CAMEL is an acronym that stands for capital adequacy, assets management capability, bank earnings, liquidity, and sensitivity. CAMEL rating is utilized by top management to regulate any possible risks (Bary, 2020). Thus, the CAMEL rating system is a reflection of the bank's capabilities to maintain capital despite facing certain risks.
In the 2019 CAMEL rating system of J.P. Morgan Chase, Bank of America, Citigroup Wells Fargo and Goldman Sachs indicate that the banks are at risk of failure despite government efforts to bail them out. The five US largest banks are trading below their value due to severe financial crisis that has since affected the banking sector. JPMorgan Chase, Bank of America and Citigroup have been awarded a 2 composite rating regarding their liquid assets. JPMorgan Chase receiving $539 billion followed by Bank of America receiving $ 45 billion government bailout despite being the second-highest rating one year ago (Burton and Seale, 2005). Citigroup, Wells Fargo, and Goldman Sachs have been ranked 4 and 5 respectively meaning that they fall under institutions that continue to perform poorly.
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In 2019, Citigroup had the highest value of the share at $ 45.74 followed by Goldman Sach book value of $ 33.28, which has since dropped. bank of America has tried to yield on its less liquid loan portfolio loan from liquid assets of only 1.5 % (Collier, Forbush and Nuxoll, 2003).this could only mean the banks with higher CAMEL ratings like bank of America can only earn up to $ 550 million in a quarter from interest income generated from $ 1000 billion liquid assets relocated from the higher-yielding loans which translate to 10 percent of profits (Collier, Forbush and Nuxoll, 2003). According to the financial Act, banking organizations are expected to maintain a leverage ratio of 10 percent .thus, expected to record a composite rating of 1 or 2 within a specified quarter.
With the changing financial situations, the banking sector has faced pressure slowing down its interests rates. For example, the Federal Reserve reducing it benchmarking rates puts pressure on the net interest income, including revenue generated by banks from the collection of the loan payment and interest paid to depositors (Burton and Seale, 2005). The banking sector needs new regulation, and the government needs to loosen capital and liquidity standards to make it easier for banks to generate profits (Burton and Seale, 2005). The most significant step is for banks to allocate larger portions of assets and liquidity government securities compared to loans. The main idea is to elevate liquidity standards by helping avert financial failure.
Despite the five major US banks recording varied CAMEL Ratings financial experts are optimistic that the US can survive any type of banking crisis especially if they make the right choices. Accurate CAMELS ratings are important not only for the top bank management but also for the government to make timely identification of financial risks and offer remediation to avert further financial losses within the banking sector.
References
Bary,A.(March 12, 2020). Why 4 of the Biggest U.S. Banks Now Trade Below Book Value. The Barrons. https://www.barrons.com/articles/coronavirus-news-51585741749
Burton, S., & Seale, G. A. (2005). A survey of current and potential uses of market data by the FDIC. FDIC Banking Rev. , 17 , 1.
Collier, C, Forbush S, and Nuxoll D. (2003). Evaluating the Vulnerability of Banks and Thrifts to a Real Estate Crisis. FDIC Banking Review 15, no. 4 19–36. https://www.fdic.gov/bank/analytical/banking/br15n4full.pdf
