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Could a CAMELS downgrade model improve off-site surveillance?


  • R. Alton Gilbert
  • Andrew P. Meyer
  • Mark D. Vaughan


The Federal Reserve’s off-site surveillance system includes two econometric models that are collectively known as the System for Estimating Examination Ratings (SEER). One model, the SEER risk rank model, uses the latest financial statements to estimate the probability that each Fed-supervised bank will fail in the next two years. The other component, the SEER rating model, uses the latest financial statements to produce a “shadow” CAMELS rating for each supervised bank. Banks identified as risky by either model receive closer supervisory scrutiny than other state-member banks.> Because many of the banks flagged by the SEER models have already tumbled into poor condition and, hence, would already be receiving considerable supervisory attention, we developed an alternative model to identify safe-and-sound banks that potentially are headed for financial distress. Such a model could help supervisors allocate scarce on- and off-site resources by pointing out banks not currently under scrutiny that need watching.> It is possible, however, that our alternative model improves little over the current SEER framework. All three models—the SEER risk rank model, the SEER rating model, and our downgrade model—produce ordinal rankings based on overall risk. If the financial factors that explain CAMELS downgrades differ little from the financial factors that explain failures or CAMELS ratings, then all three models will produce similar risk ratings and, hence, similar watch lists of one- and two-rated banks.> We find only slight differences in the ability of the three models to spot emerging financial distress among safe-and-sound banks. In out-of-sample tests for 1992 through 1998, the watch lists produced by the downgrade model outperform the watch lists produced by the SEER models by only a small margin. We conclude that, in relatively tranquil banking environments like the 1990s, a downgrade model adds little value in off-site surveillance. We caution, however, that a downgrade model might prove useful in more turbulent banking times.

Suggested Citation

  • R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2002. "Could a CAMELS downgrade model improve off-site surveillance?," Review, Federal Reserve Bank of St. Louis, issue Jan., pages 47-63.
  • Handle: RePEc:fip:fedlrv:y:2002:i:jan.:p:47-63:n:v.84no.1

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    References listed on IDEAS

    1. Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 195-208, October.
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    4. Rebel A. Cole & Jeffery W. Gunther, 1995. "FIMS: a new monitoring system for banking institutions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-15.
    5. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
    6. Gunther, Jeffery W. & Moore, Robert R., 2003. "Early warning models in real time," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 1979-2001, October.
    7. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
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    10. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 1999. "The role of supervisory screens and econometric models in off-site surveillance," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 31-56.
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    Cited by:

    1. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, vol. 2(4), pages 312-336, March.
    2. Peresetsky, A. A., 2011. "What factors drive the Russian banks license withdrawal," MPRA Paper 41507, University Library of Munich, Germany.
    3. Peresetsky, Anatoly, 2013. "Modeling reasons for Russian bank license withdrawal: Unaccounted factors," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 30(2), pages 49-64.

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