CAMELS Rating System & Banking Sector of Pakistan

Banking industry serves as the backbone of the financial sector that accumulates saving from surplus economic units in the form of deposits and provides it to deficit economic units in the form of advances. So it is of great importance to keenly observe the performance of the banks and their compliance with the regulatory requirements. Performance of the banks is measured at two levels, one is at the management and regulatory level of the banks and another is at external rating agencies. It is of great importance that both these ratings present the same results about the condition of the banks to provide clear information to investors and management. CAMELS is the supervisory and regulatory rating system implemented by State Bank of Pakistan. It takes into account six important components of a bank when it evaluates performance of the bank. These components are Capital, Assets, Management, Earning, Liquidity and Sensitivity to market risk. PACRA rating agency is the dominant credit rating agency of Pakistan that performs ratings for most banks. In our research we examine the similarities in the results generated by CAMELS rating system and PACRA rating agency.