Rating the Quality of Banks - Scary!

 
     

Bank Ratings, then...

...and now.

Financial analysts, like military types, are fond of using acronyms. These abbreviations can be useful in either simplifying overly complicated ideas and concepts, or putting a snappy name on irredeemably inscrutable notions. Anyone who has had his/her 401k and IRA whiplashed by CLOs, ETFs and MBSs issued by BAML, DBS, CS, ING etc. over the past few years knows what I am talking about.

The criteria used to assess the health of banks is no exception. For many years now, a commonly used method of analyzing the quality of banks has been the CAMELS grading system. It stands for Capital, Asset quality, Management, Earnings, asset/Liability management, and Sensitivity to market risk. Banks are scored 1 to 5 on each criterion. The US bank regulators utilize this system on a regular basis and provide the results to banks’ management teams (though not to the public). In theory, this is all well and good – no one would argue that the CAMELS components are not the correct ones to focus on. However, it’s hard not to think that CAMELS is a misnomer. Banks are hardly the type of creatures that can steadfastly trudge their way through a hostile environment and remain standing when others would drop of dehydration and exposure.

Now, we have an alternative. Berenberg Bank, a small, steady German private bank (the type that services an elite clientele), has come up with another acronym to rate the durability of European banks – SCARY. It stands for Solvency, Complexity, Adaptability, Risk, and ‘Yes, we do believe in structural change’. Okay, the ‘Y’ is a bit of a stretch, but at least it tries to capture a very important feature of a bank’s profile – its culture. Not surprisingly, Berenberg’s analysis revealed that the riskiest European banks are those in Italy, Spain and France. Some of the global banks such as Barclays and UBS received a mixed report card. The winners tended to be the stiff-backed and stingy northern European banks. The good news for Asia is that HSBC was among the strongest names.

So Berenberg Bank is on to something; if nothing else, SCARY is a better reflection than CAMELS of the zeitgeist of the times. And Berenberg should know something about adaptability. After all, they’ve been around since 1590, making them one of the oldest banks in the world. OMG!

LINK: http://www.efinancialnews.com/story/2013-01-29/scary-the-terrifying-new-banking-acronym?mod=sectionheadlines-AM-IB