CAMELS is a rating system developed in the US that is used by supervisory authorities to rate banks and other financial institutions. It applies to every bank in the U.S and is also used by various financial institutions outside the U.S. This rating system was adopted by National Credit Union Administration in 1987. In 1988, the Basel Committee on Banking Supervision of the Bank of International Settlements (BIS) proposed the CAMELS framework for assessing financial institutions.
The ratings are assigned based on the financial statements of the bank or financial institution. This system helps the supervisory authorities to identify banks that need maximum amount of regulatory concern. It is used to measure risk and financial stability of a bank. It determines the banks overall conditions in the areas of financial, managerial and operational aspects.
The rating system consists of a score from one to five with score one considered as best and score five considered as the worst for each factor. Banks which obtain the score of one are considered most stable, banks with a score of 2 or 3 are considered average and those with 4 or 5 considered as below average and are subjected to supervisory scrutiny.
Check out the factors for giving scores here4.