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CS Professional · Banking and Insurance - Laws and Practice · Analysis of Financial Statements of Banks

A Mumbai-based bank's supervisor reviews its Tier 1 capital, risk-weighted assets and capital adequacy ratio during an examination under the CAMELS framework. Which CAMELS component is this review mainly assessing?

The review assesses capital adequacy, the 'C' of CAMELS. Measures such as Tier 1 capital, risk-weighted assets and the capital adequacy ratio show whether a bank has enough capital to absorb losses. Asset quality, liquidity and sensitivity cover different aspects of the bank.

  1. ACapital adequacyCorrect
  2. BAsset quality
  3. CLiquidity
  4. DSensitivity to market risk

Explanation

The 'C' in CAMELS stands for capital adequacy, which is assessed through ratios such as CRAR and Tier 1 capital to risk-weighted assets. Asset quality looks at NPAs and provisioning, liquidity looks at the ability to meet obligations, and sensitivity looks at market risk exposure.

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