Jonathan Weil of Bloomberg wrote an interesting piece where he argues that CAMELs ratings should be made public. He argues the secrecy of the ratings allows the institutions to act recklessly, which hurts the economy, and ultimately hurts investors and public confidence in the markets. His solution is to treat the banks like restaurants and make their health grades public information:
Regulators haven’t shown themselves to be any better than the markets are when it comes to uncovering big problems at federally insured banks. We might as well make all their examination findings open records. That way, the public can see when the regulators are failing at their jobs. Depositors can make fully informed choices about where to keep their money. And banks will be under much greater pressure to fix their problems.
Making CAMELs ratings public: good or bad idea?
I'm not so sure it is. The industry is not in a great place right now (as seen by the terrible recruiting prospects) and I don't think now (if ever) is the right time to place more pressure on the financial industry. Am I wrong?
It's largely irrelevant at this point who rates banks or what they are rated. Until you bring ALL of their exposures onto their balance sheet and allow investors to actually figure out what they are buying ratings are pretty much irrelevant. I agree that you should make everything possible available to investors but already there is so much information out there I think you can piece together which banks are screwed and which aren't. You know what would really make them accountable for their jobs? Let banks fail.
I mean it isn't that hard to put together a CAMEL rating on a bank with information already out there. Besides, I still think that bank balance sheets and exposures are so opaque that you can only gauge them to a point anyway. How have those ratings been working out so far for us?
I didn't really know what CAMELs ratings were, so I went ahead and looked it up. It's essentially the NCUA's credit rating for banks and thereby the financial instruments they buy/sell, and is based on six components:
(C) Capital adequacy, (A) Asset quality, (M) Management, (E) Earnings, (L) Liquidity and (S) Sensitivity to Market Risk
First, the majority of any banks balance sheet is made up of OBS (off balance sheet) activities, thus making them nearly impossible to value. Swaps, letters of credit, everything--trillions of dollars just floating around that no one other than management gets to evaluate. If the brightest investors out there can't accurately value a FI, I sure don't trust some bumbling credit union analyst to do it.
On it's face, it looks like something the public ought to have access to and knowledge of. But the more I think about it, the more I agree with you that it just adds one more factor into the mix that chips away consumer confidence. Not to mention--since when have credit agencies been reliable? Fitch downgraded the fucking US for crying out loud. I don't see any good coming from it other than a depression era bank-run when times get hard.
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