How It Works

IDC's CAMEL describes the 24 financial ratios used to compute the one-number summary rating of bank safety. Each financial institution evaluated has an analysis of financial ratios and a one-number summary rank. Ratings range from 1, the lowest, to 300, the top grade attainable. The result is a quick, at-a-glance financial strength assessment that promotes direct and straightforward comparisons between any bank, savings institution, or credit union. IDC's unique "CAMEL" analysis utilizes financial ratios that have a significant impact on the quality of financial institutions:

  • Capital risk is determined by Tier I capital as a percent of assets and is a percent of risk-based assets. Tier I & II capital as a percent of risk-based assets (risk-based capital ratio) measures credit and interest rate risk as well as estimates risk in the asset base.
  • Adequacy of Capital and loan loss reserves measures the levels of delinquent loans, nonaccrual loans, restructured and foreclosed assets relative to loan loss reserves and capital. Risk-adjusted assets, as part of the risk-based capital ratio, further define the quality of assets.
  • Margins are the best measurement of management's financial controls and performance. Margins represent the spreads between (1) operating costs and net operating revenues, (2) after-tax return on earning assets versus the cost of funding leverage, and (3) IDC’s definition of return on equity capital compared to our cost of equity capital.
  • Earning returns (ROE) measure the success of the institution's operating and financial strategies. Ratios of revenue yields from investments, loans, and noninterest income with comparison to operating costs, loan loss provision, net loan charge-offs, and net non-operating income ratios are the major components of the measure of operating strategy, as computed by the net operating after-tax return on earning assets (ROEA). Earnings from financial leverage (ROFL) measure the level of leverage and after-tax cost of funding compared to the after-tax return on earning assets (ROEA). Leverage returns (ROFL) measure the efficiency of the institution's financial strategy. Operating assets are financed with the leverage of deposits and borrowings to Tier I capital and its comparative cost. The leverage multiplier illustrates the degree of leverage, while the leverage spread measures its cost relative to operating returns (ROEA). Earning return on equity or ROE = ROEA + ROFL.
  • Liquidity measures (1) balance sheet cash flow as a percent of Tier I capital and (2) loans compared to stable deposits and borrowings plus estimated unused lines of credit at the Federal Home Loan Bank.

Each of the 24 financial ratios used to calculate a summary rating of bank safety has absolute multiples or relative weights to the universe of competing institutions.