WASHINGTON — The industry’s health — as judged by Camels ratings assigned by federal bank and thrift examiners — peaked in 1998 and has gradually deteriorated ever since.

Federal Deposit Insurance Corp. data compiled for American Banker showed that examiners reduced the Camels scores for 801 banks and thrifts last year but raised them for 551 — a net negative change of 250 institutions. That’s 3.73% of the 6,705 banks and thrifts examined in 2000. The Camels rating change was a negative 3.38% in 1999 and a negative 0.04% in 1998. For comparison, a net 329 banks and thrifts won higher Camels grades in 1997, or 4.12% of the 7,994 exams done that year.

Experts predicted the downward trend will continue, and even accelerate.

“I think it will, definitely, and faster as this slowdown continues,” former FDIC Chairman L. William Seidman said in an interview Wednesday. “There is nobody that better reflects the economy than banks, except they are always a lagging indicator.”

Mr. Seidman attributed the Camels downgradings to banks that finally tightened loan standards, forcing them to reclassify credits that had been granted in earlier, better economic times. “About 1998 is when the banks realized that prosperity was starting to erode their positions,” he said. “Banks had loosened their standards because things looked too good. So the lower rankings are the result of their own tighter standards.”

Camels scores are the industry’s performance yardstick, and examiners assign a composite grade as well as individual scores on six components: capital, asset quality, management, earnings, liquidity, and sensitivity to risks (risk management). Camels scores range from 1 to 5, with 1 reserved for the industry’s best performers.

Though the downward trend began in 1998, last year was the first in which scores in all six Camels categories were negative, meaning the number of downgradings exceeded the number of improved grades in each category. FDIC officials agreed that the negative trend is likely to continue but said the industry’s overall performance is still relatively positive.

“There is some deterioration in ratings. However, I don’t want to sound any unnecessary alarm bells because we are starting from a very high point,” said Rae-Ann Miller, assistant director for operations in the FDIC’s supervision division, in an interview Wednesday. “This is what you would expect coming off such tremendous times of prosperity. It can’t go anywhere but down.”

The FDIC will not say how many banks get which Camels rating, though it does provide rough breakdowns. The number of so-called “problem banks,” the ones with Camels ratings of 4 or 5, rose to 94 last year from 84 in 1998. The number of institutions rated 1 or 2 on the Camels scale slipped to 9,905 last year from 10,523 in 1998.

The number of average banks, those with Camels ratings of 3, has steadily climbed during the last three years, reaching 662 last year from 277 in 1998. Ms. Miller traced the trend toward lower Camels scores to the economic problems that surfaced in 1998, including the Russian debt crisis.

The trouble spots examiners identified in 2000 were liquidity and risk management. But Ms. Miller warned against reading too much in to these two areas’ big declines in ratings because most of the dip reflected the best-rated banks’ dropping to Camels 2. Examiners, she also noted, do not give equal weight to each of the six components when computing the composite score.

For instance, with newly chartered banks examiners might discount the earnings component while emphasizing strong management. That is because overhead expense associated with starting a business will reduce profits but the institution needs leadership.

Though ratings for asset quality and earnings actually recovered a bit in 2000, Ms. Miller said they remain regulators’ primary focus. “I am always most concerned about credit quality — that’s always the bread and butter of financial institutions,” she said.


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