International Journal of Banking, Risk and Insurance

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Dimensionality of the CAMELS Model - A Case Study of Indian Banks


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1 Alliance University, Bengaluru, Karnataka, India
     

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The CAMELS model is one of the most extensively used approaches in bank performance assessment (Sahajwala & Van der Bergh, 2000). It is based on 6 ‘dimensions’: capital adequacy, asset quality, management soundness, earnings potential, liquidity, and sensitivity to market risk. However, the dimensionality of the CAMELS model has never been empirically examined in literature. The present study analyses the dimensionality of the CAMELS model using exploratory factor analysis. The study was performed using a sample of 19 public sector banks and 17 private sector banks operating in India, over the study period 2007-2011, a period of financial crisis and turbulence, prior to the adoption of the Basel III norms. The results of the study suggest that the CAMELS framework should be reorganised, with the same underlying variables, grouped through factor analysis, and prioritised by variance explained. The model provides an explicit measurement of risk as a separate dimension of bank performance. The results of the study also suggest that liquidity, earnings performance, and risk are closely related to one another, with significant negative impact on each other.

Keywords

CAMELS Model, Dimensionality, Exploratory Factor Analysis.
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  • Dimensionality of the CAMELS Model - A Case Study of Indian Banks

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Authors

Mihir Dash
Alliance University, Bengaluru, Karnataka, India

Abstract


The CAMELS model is one of the most extensively used approaches in bank performance assessment (Sahajwala & Van der Bergh, 2000). It is based on 6 ‘dimensions’: capital adequacy, asset quality, management soundness, earnings potential, liquidity, and sensitivity to market risk. However, the dimensionality of the CAMELS model has never been empirically examined in literature. The present study analyses the dimensionality of the CAMELS model using exploratory factor analysis. The study was performed using a sample of 19 public sector banks and 17 private sector banks operating in India, over the study period 2007-2011, a period of financial crisis and turbulence, prior to the adoption of the Basel III norms. The results of the study suggest that the CAMELS framework should be reorganised, with the same underlying variables, grouped through factor analysis, and prioritised by variance explained. The model provides an explicit measurement of risk as a separate dimension of bank performance. The results of the study also suggest that liquidity, earnings performance, and risk are closely related to one another, with significant negative impact on each other.

Keywords


CAMELS Model, Dimensionality, Exploratory Factor Analysis.

References