CAMEL
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Riding The CAMEL
In assessing the credit risk of dealing with other banks, Canadian financial institutions, like many other banks, use some form of a CAMEL analysis -- Capital, Asset Quality, Management, Earnings, and Liquidity.
CAMEL analysis is common since analyzing a bank is very different from analyzing a corporate -- a cash flow analysis of a bank just doesn't work. Furthermore, to be meaningful, any ratios have to be viewed in comparison to other banks in the same country.
Using a sliding scale that converts risk assessment to points, and factoring in the capital of the other bank (as well as their own capital base), Canadian banks set guidelines on the maximum amount they would lend.
The majority of exposure that the banks have with one another usually takes the form of derivatives -- mostly foreign exchange forwards and swaps. Derivative exposures add another layer to the existing symbiotic relationships between banks.
In assessing the credit risk of dealing with other banks, Canadian financial institutions, like many other banks, use some form of a CAMEL analysis -- Capital, Asset Quality, Management, Earnings, and Liquidity.
CAMEL analysis is common since analyzing a bank is very different from analyzing a corporate -- a cash flow analysis of a bank just doesn't work. Furthermore, to be meaningful, any ratios have to be viewed in comparison to other banks in the same country.
Using a sliding scale that converts risk assessment to points, and factoring in the capital of the other bank (as well as their own capital base), Canadian banks set guidelines on the maximum amount they would lend...