The Early Warning Signal of a Coming Banking Crisis
Components of IDCFP’s CAMEL, Which Forecast the 2008 Economic Crisis in Banking as Early as 2005, Provide an Early Warning System in Coming Years
This article on “The Early Warning Signal of a Coming Banking Crisis” summarizes with recent individual articles on the components of CAMEL:
1. At the low risk point in the banking cycle, the number of banks and savings institutions ranked less than “125” or investment grade reached the lowest level in the 2nd quarter data of 2006 and was preceded in 2005 by components of IDCFP’s CAMEL ratings reaching their respective lows - - all forecasting the coming banking crisis.
2. At point of maximum risk of bank failure, the components of IDCFP’s CAMEL lagged the peak risk in the 2nd quarter data of 2009, followed by peaks in the individual components of CAMEL as late as 2010.
Brokers of CDs and investors in CDs, as well as insurance companies, federal agencies, state governments, interbank lending, and a host of other institutions rely on IDCFP ratings of commercial banks and savings institutions to make better decisions using its unique and proprietary CAMEL methodology.
Early Warning Indicators (see Table I)
The low in the number of commercial banks and savings institutions ranked below the industry standard as investment grade “125” occurred in the 2nd quarter of 2006, two years before the banking crisis in 2008. Most important, however, is that all but 1 of the 5 components of CAMEL reached a low in their number of institutions from the 3rd quarter of 2005 through the 1st quarter of 2006 – prior to the low count for all institutions ranked less than “125” in the 2nd quarter of 2006.
As seen in Table I below, commercial banks and savings institutions not well capitalized (“C” in CAMEL) reached a low of 47 in the 3rd quarter of 2006. Financial institutions measuring adequacy of capital with adjusted Tier 1 capital below 5% (Tier 1 capital adjusted for bad and delinquent loans net of the loan loss reserve), the “A” in CAMEL, reached a low count of 29 in the 3rd quarter of 2005. Banks and savings institutions with a lack of profitability or low and unstable margins, the “M” in CAMEL, reached a low of 178 in the 4###sup/sup### quarter of 2005. The commercial banks and savings institutions with severe negative “Earnings due to Leverage” (the “E” in CAMEL) reached their low of 185 in the 4###sup/sup### quarter of 2005, two quarters before the total number of institutions ranked below “125” reached its low in the 2nd quarter of 2006. Finally, institutions with high loan delinquency and negative balance sheet cash flow – the “L” in CAMEL – reached their low of 2 in the 1st quarter of 2006.
IDC Financial Publishing, Inc. is Your Early Warning System of a Future Financial Crisis.
Table I
Components of CAMEL Forecast Banking Crisis in 2005, up to Three Quarters
Before the Total Ranked Below “125” in June of 2006
What do the Early Warning Signals Indicate Today? (see Table II)
The number of commercial banks and savings institutions continues to decline in all categories of CAMEL, as of the 3rd quarter of 2017 analysis of the data (see Table II). The total number of institutions ranked less than “125” by IDCFP continues to decline. Given the Trump administration tax cuts, reduced regulation, government efficiencies, infrastructure spending and more, banking is expected to remain healthy over the next few years. IDCFP measures its rankings on all commercial banks and savings institutions each quarter and pays special attention to the number of institutions ranked less than “125” by category of CAMEL, as well as, the total.
Table II
All Components of CAMEL that Indicate Risk in Early Warning System are Still Declining
IDCFP has been helping CD brokers and investors, insurance companies, federal agencies, numerous state governments and a host of other institutions make better decisions using its unique and proprietary CAMEL rating methodology since 1985. For more information on CAMEL go to www.idcfp.com or call 1-800-525-5475.
