CAMEL ratings and the CD market

This article investigates the relationship between CD rates as a measure of bank risk and the confidential CAMEL scores assigned to a bank as a result of an onsite examination. CAMEL ratings determine whether a bank is placed on the problem list and expresses the examiner's belief that the bank should be subjected to enhanced surveillance. In the view of regulators, CAMEL ratings are based on inside information and hence should be confidential. The empirical results in this article suggest that CAMEL ratings are primarily proxies for available market information about the quality of a bank.The first draft of this article was prepared while the author was a Visiting Scholar at the Federal Deposit Insurance Corporation in the summer of 1988. This article reflects the opinions and analysis of the author and not the Federal Deposit Insurance Corporation