CAMEL Based Derived W-Score Function for Banks Performance Evaluation: An Urgent Necessity

Abstract

While the consequences of the credit crunch appear all too apparent, the intricacies of the complex financial instruments involved, combined with the vast sweep of the global financial system, seem to defy explanation. Attempts to accuse negligent regulators, fraudulent brokers and greedy borrowers cast much blame but little light on the causes of the crises. This paper has as its primary objective not to advise on the measures to be taken to combat the present economic state but to derive an integral CAMEL based function that can be used by banks regulators and managements to check, monitor, identify and correct emerging problems at short notice on a daily, weekly, monthly or annul basis before they become out-of-bounds or unbearable. The data for this research work is secondary. The study builds on the coefficients of the identified best ratios for CAMEL now CLEAM as in Wirnkar and Tanko (2008) at SSRN http://ssrn.com/abstract=1150968. Statistical techniques are used to further manipulate the data towards arriving at the objective of the paper. The paper derived a function known as the W-Score. That is W-Score =0.20886579C-0.197883635L 0.197834192E-0.197730975A-0.197685405M. The respective W-scores for best performing bank, average performing bank and least performing bank were ascertained. Margins of safety for each component in CAMEL were also computed. As one of the recommendations of this paper, bank' regulators and those in academia are implored to test the efficacy of the CAMEL (CLEAM) derived function and certify its application in the banking industry.

Keywords: Credit Crunch, Global Financial Meltdown, Bank Performance, Camel, CLEAM, W-Score Function

JEL Classification: G21, G34