What are the Elements of Camels Rating

Capital Adequacy: Adequate bank capital reduces the bank's risk to maintain its normal course of business. Capital adequacy is measured through capital ratio and it is generally defined as capital divided by assets. Authority of central bank has become increasingly concerned that some commercial banks do not hold enough capital to maintain depositors demand and eventually have increased capital requirements. 

Asset Quality: Each and every bank makes it own decision as to how deposited funds should be allocated, and these decisions determine its level of credit and default risk. Banking regulators evaluate the quality of the bank's assets including its loans, advances as well as its securities.

Management: Managerial performance is a key element of the mentioned camels rating. Without proper and effective management of bank's operations, they cannot earn satisfactory results.   

Earnings Quality: Earnings quality very much important among all other elements of camels rating. Most of the banks fail when their earnings become consistently negative as compare to their operational cost.   

Liquidity: Some commercial banks hold funds from some outside sources for example securities market or central bank. This may cause liquidity crisis for banks when they need funds to meet their depositor’s obligations.

Sensitivity: Banks earnings and valuations are exposed to financial market conditions for example interest rates, stock market conditions, and exchange rates. Consequently, banking regulators assess the degree to which a bank might be exposed to adverse financial market condition.