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Chapter 12 - Commercial banks’ financial statements and analysis. This chapter analyzed the financial statements of commercial banks. The assets, liabilities, and equity capital were described as they appear in the balance sheet. The financial statements of other FIs such as savings banks and credit unions take a similar form. The income and expenses were described as they appear in the income statement. | 8- McGraw-Hill/Irwin Chapter Twelve Commercial Banks’ Financial Statements and Analysis 12- McGraw-Hill/Irwin CAMELS Ratings Regulators use CAMELS ratings to evaluate the safety and soundness of banks CAMELS ratings rely heavily on financial statement data Components Capital adequacy Asset quality Management quality Earnings quality Liquidity Sensitivity to market risk 12- McGraw-Hill/Irwin CAMELS Ratings CAMELS ratings range from 1 to 5 Composite “1”—banks are basically sound in every respect Composite “2”—banks are fundamentally sound, but may have modest weaknesses correctable in the normal course of business Composite “3”—banks exhibit financial, operational, or compliance weaknesses ranging from moderately severe to unsatisfactory Composite “4”—banks have an immoderate volume of serious financial weaknesses or a combination of other conditions that are unsatisfactory Composite “5”—banks have an extremely high immediate or near term probability of failure 12- McGraw-Hill/Irwin Financial Statements The Federal Financial Institutions Examination Council (FFIEC) prescribes uniform principles, standards, and report forms for depository institutions balance sheets are reported on report of condition forms income statements are reported on report of income forms commercial banks report contingent assets and liabilities on off-balance-sheet reports Retail banks focus business activities on consumer banking relationships Wholesale banks focus business activities on commercial banking relationships most wholesale banks also engage in retail banking 12- McGraw-Hill/Irwin Commercial Bank Assets Cash and balances due from other depository institutions Investment securities short-term securities (e.g, Treasury bills and fed funds sold) long-term securities (e.g., Treasury bonds, munis, MBSs) Loans commercial and industrial real estate consumer other loans Unearned income and allowance for loan and lease losses Other assets (e.g., fixed . | 8- McGraw-Hill/Irwin Chapter Twelve Commercial Banks’ Financial Statements and Analysis 12- McGraw-Hill/Irwin CAMELS Ratings Regulators use CAMELS ratings to evaluate the safety and soundness of banks CAMELS ratings rely heavily on financial statement data Components Capital adequacy Asset quality Management quality Earnings quality Liquidity Sensitivity to market risk 12- McGraw-Hill/Irwin CAMELS Ratings CAMELS ratings range from 1 to 5 Composite “1”—banks are basically sound in every respect Composite “2”—banks are fundamentally sound, but may have modest weaknesses correctable in the normal course of business Composite “3”—banks exhibit financial, operational, or compliance weaknesses ranging from moderately severe to unsatisfactory Composite “4”—banks have an immoderate volume of serious financial weaknesses or a combination of other conditions that are unsatisfactory Composite “5”—banks have an extremely high immediate or near term probability of failure .
