Using CAMEL ratings to evaluate regulator effectiveness at commercial banks

This study uses the capital adequacy component of the CAMEL rating system to assess whether regulators in the 1980s influenced inadequately capitalized banks to improve their capital. Using a measure of regulatory pressure that is based on publicly available information, I find that inadequately capitalized banks responded to regulators' demands for greater capital. This conclusion is consistent with that reached by Keeley (1988). Yet, a measure of regulatory pressure based on confidential capital adequacy ratings reveals that capital regulation at national banks was less effective than at state-chartered banks. This result strengthens a conclusion reached by Gilbert (1991).Much of the research for this article was carried out while I was a graduate student at the University of Florida. I thank Chris James, Mark Flannery and Joel Houston, members of my dissertation committee, for their helpful suggestions and guidance. I also thank the anonymous reviewers and editor Paul Horvitz for many substantive comments on earlier drafts.