MarketingMarketing is communicating the value of a product, service, or brand to customers, for the purpose of promoting or selling that product, service, or brand.Marketing techniques includes choosing target markets through market analysis and market segmentation, as well as understanding consumer behavior and advertising a products value to the customers.From a societal point of view, marketing is the link between a societys material requirement and its economic patterns of response.Marketing satisfies these needs and wants through exchange processes and building long-term relationships.

EconomicsSuggestion:Short Note:1. Fixed Vs. Variable Cost2. CRR3. Floating Exchange Rate4. CAMELS Rating5. Indifference Curve6. Inflation7. Opportunity Cost8. Repo Reverse Repo9. Fixed Exchange Rate 10. De-valuation of Money11. Monopolistic competition5. Indifference Curve:In microeconomic theory, an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the customer. In other words an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come. The main use of indifference curve is in the representation of potentially observable demand patterns for individual consumers over commodity bundles. There are infinitely many indifference curves: one passes through each combination. An example of an indifference curve with three

Fixed costFrom Wikipedia, the free encyclopedia

Decomposing Total Costs as Fixed Costs plus Variable Costs. Along with variable costs, fixed costs make up one of the two components of total cost: total cost is equal to fixed costs plus variable costs.In economics, fixed costs, indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related (and are paid per quantity produced).In management accounting, fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period. For example, a retailer must pay rent and utility bills irrespective of sales.In marketing, it is necessary to know how costs divide between variable and fixed. This distinction is crucial in forecasting the earnings generated by various changes in unit sales and thus the financial impact of proposed marketing campaigns. In a survey of nearly 200 senior marketing managers, 60 percent responded that they found the "variable and fixed costs" metric very useful.[1]Fixed costsFixed costs are not permanently fixed; they will change over time, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production; and warehouse costs and the like are fixed only over the time period of the lease.By definition, there are no costs in the long run, because the long run is a sufficient period of time for all short-run fixed inputs to become variable.[2][3] Investments in facilities, equipment, and the basic organization that can't be significantly reduced in a short period of time are referred to as committed fixed costs. Discretionary fixed costs usually arise from annual decisions by management to spend on certain fixed cost items. Examples of discretionary costs are advertising, machine maintenance, and research & development expenditures. Discretionary fixed costs can be expensive.[4]In business planning and management accounting, usage of the terms fixed costs, variable costs and others will often differ from usage in economics, and may depend on the context. Some cost accounting practices such as activity-based costing will allocate fixed costs to business activities for profitability measures. This can simplify decision-making, but can be confusing and controversial.[5][6]In accounting terminology, fixed costs will broadly include almost all costs (expenses) which are not included in cost of goods sold, and variable costs are those captured in costs of goods sold. The implicit assumption required to make the equivalence between the accounting and economics terminology is that the accounting period is equal to the period in which fixed costs do not vary in relation to production. In practice, this equivalence does not always hold, and depending on the period under consideration by management, some overhead expenses (e.g., sales, general and administrative expenses) can be adjusted by management, and the specific allocation of each expense to each category will be decided under cost accounting.Variable costFrom Wikipedia, the free encyclopedia

Decomposing Total Costs as Fixed Costs plus Variable Costs.Variable costs are costs that change in proportion to the good or service that a business produces.[1] Variable costs are also the sum of marginal costs over all units produced. They can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct costs, however, are costs that can easily be associated with a particular cost object.[2] However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.Direct labor and overhead are often called conversion cost,[3] while direct material and direct labor are often referred to as prime cost.[3]In marketing, it is necessary to know how costs divide between variable and fixed. This distinction is crucial in forecasting the earnings generated by various changes in unit sales and thus the financial impact of proposed marketing campaigns. In a survey of nearly 200 senior marketing managers, 60 percent responded that they found the "variable and fixed costs" metric very useful.[4]Contents 1 Explanation 1.1 Example 1 1.2 Example 2 2 See also 3 Notes 4 ReferencesExplanationExample 1Assume a business produces clothing. A variable cost of this product would be the direct material, i.e., cloth, and the direct labor. If it takes one laborer 6 yards of cloth and 8 hours to make a shirt, then the cost of labor and cloth increases if two shirts are produced.1 shirt2 shirts3 shirts

Cloth (Direct Materials)6yds12yds18yds

Labor (Direct Labor)8hrs16hrs24hrs

The amount of materials and labor that goes into each shirt increases in direct proportion to the number of shirts produced. In this sense, the cost "varies" as production varies.Example 2For example, a firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used, and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention. These costs are variable costs.A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.For some employees, salary is paid on monthly rates, independent of how many hours the employees work. This is a fixed cost. On the other hand, the hours of hourly employees can often be varied, so this type of labour cost is a variable cost. The cost of material is a variable cost.Indifference curveFrom Wikipedia, the free encyclopedia

An example of an indifference map with three indifference curves representedIn microeconomic theory, an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.Floating exchange rateA floating exchange rate or fluctuating exchange rate is a type of exchange-rate regime in which a currency's value is allowed to fluctuate in response to market mechanisms of the foreign-exchange market. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency.In the modern world, most of the world's currencies are floating; such currencies include the most widely traded currencies: the United States dollar, the euro, the Japanese yen, the British pound, and the Australian dollar. From September 2011 until January 2015, the Swiss franc, which had formerly traded via a floating exchange rate, had its floor pegged to the euro.[1][2] However, central banks often participate in the markets to attempt to influence the value of floating exchange rates. The Canadian dollar most closely resembles a "pure" floating currency, because the Canadian central bank has not interfered with its price since it officially stopped doing so in 1998. The US dollar runs a close second, with very little change in its foreign reserves; in contrast, Japan and the UK intervene to a greater extent.From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971, the US decided no longer to uphold the dollar exchange at 1/35th of an ounce of gold, so that the currency was no longer fixed. After the 1973 Smithsonian Agreement, most of the world's currencies followed suit. However, some countries, such as most of the Gulf States, fixed their currency to the value of another currency, which has been more recently associated with slower rates of growth. When a currency floats, targets other than the exchange rate itself are used to administer monetary policy (see open-market operations).Opportunity costFrom Wikipedia, the free encyclopedia

In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available.[1] The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen". Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice".[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be Opportunity costs in productionExplicit costsExplicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends $100 on electrical power consumed, its explicit opportunity cost is $100.[5] This cash expenditure represents a lost opportunity to purchase something else with the $100.Implicit costsImplicit costs (also called implied, imputed or notional costs) are the opportunity costs not reflected in cash outflow but implied by the failure of the firm to allocate its existing (owned) resources, or factors of production to the best alternative use. For example: a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using them for production.EvaluationNote that opportunity cost is not the sum of the available alternatives when those alternatives are, in turn, mutually exclusive to each other it is the next best alternative given up selecting the best option. The opportunity cost of a city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land. Use for any one of those purposes would preclude the possibility to implement any of the other.ExampleQ: Suppose you have a free ticket to a concert by Band A. The ticket has no resale value. On the night of the concert your next-best alternative entertainment is a performance by Band B for which the tickets cost $40. You like Band B and would usually be willing to pay $50 for a ticket to see them. What is the opportunity cost of using your free ticket and seeing Band A?A: The benefit you forgo (that is, the value to you) is the benefit of seeing Band B. As well as the gross benefit of $50 for seeing Band B, you also forgo the actual $40 of cost, so the net benefit you forgo is $10. So, the opportunity cost of seeing Band A is $10.[6]The main point is that opportunity cost is the one forgone and gets the best available alternative.Fixed exchange-rate system

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. There are benefits and risks to using a fixed exchange rate. A fixed exchange rate is usually used in order to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable or more internationally prevalent currency (or currencies), to which the value is pegged. In doing so, the exchange rate between the currency and its peg does not change based on market conditions, the way floating currencies will do. This makes trade and investments between the two currency areas easier and more predictable, and is especially useful for small economies in which external trade forms a large part of their GDP.A fixed exchange-rate system can also be used as a means to control the behavior of a currency, such as by limiting rates of inflation. However, in doing so, the pegged currency is then controlled by its reference value. As such, when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the MundellFleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.In a fixed exchange-rate system, a countrys central bank typically uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, hence, the stable value of its currency in relation to the reference to which it is pegged. The central bank provides the assets and/or the foreign currency or currencies which are needed in order to finance any payments imbalances.[1]In the 21st century, the currencies associated with large economies typically do not fix or peg exchange rates to other currencies. The last large economy to use a fixed exchange rate system was the People's Republic of China which, in July 2005, adopted a slightly more flexible exchange rate system called a managed exchange rate.[2] The European Exchange Rate Mechanism is also used on a temporary basis to establish a final conversion rate against the Euro () from the local currencies of countries joining the Eurozone.Monopolistic competitionFrom Wikipedia, the free encyclopedia

Short-run equilibrium of the firm under monopolistic competition. The firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm is able to collect a price based on the average revenue (AR) curve. The difference between the firm's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit.

Long-run equilibrium of the firm under monopolistic competition. The firm still produces where marginal cost and marginal revenue are equal; however, the demand curve (and AR) has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profitMonopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.[1][2] In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933).[3] Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition.Monopolistically competitive markets have the following characteristics: There are many producers and many consumers in the market, and no business has total control over the market price. Consumers perceive that there are non-price differences among the competitors' products. There are few barriers to entry and exit.[4] Producers have a degree of control over price.The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.Contents 1 Major characteristics 1.1 Product differentiation 1.2 Many firms 1.3 No entry and exit costs 1.4 Independent decision making 1.5 Market power 1.6 Imperfect information 2 Inefficiency 2.1 Socially undesirable aspects compared to perfect competition 3 Problems 4 Examples 5 See also 6 Notes 7 External linksMajor characteristicsThere are six characteristics of monopolistic competition (MC): Product differentiation Many firms No entry and exit cost in the long run Independent decision making Some degree of market power Buyers and Sellers do not have perfect information (Imperfect Information)[5][6]Product differentiationMC firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes. Technically, the cross price elasticity of demand between goods in such a market is positive. In fact, the XED would be high.[7] MC goods are best described as close but imperfect substitutes.[7] The goods perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of motor vehicles is the sameto move people and objects from point to point in reasonable comfort and safety. Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks and cars, and many variations even within these categories.Many firmsThere are many firms in each MC product group and many firms on the side lines prepared to enter the market. A product group is a "collection of similar products".[8] The fact that there are "many firms" gives each MC firm the freedom to set prices without engaging in strategic decision making regarding the prices of other firms and each firm's actions have a negligible impact on the market. For example, a firm could cut prices and increase sales without fear that its actions will prompt retaliatory responses from competitors.How many firms will an MC market structure support at market equilibrium? The answer depends on factors such as fixed costs, economies of scale and the degree of product differentiation. For example, the higher the fixed costs, the fewer firms the market will support.[9] Also the greater the degree of product differentiationthe more the firm can separate itself from the packthe fewer firms there will be at market equilibrium.No entry and exit costsIn the long run there are no entry and exit costs. There are numerous firms waiting to enter the market, each with their own "unique" product or in pursuit of positive profits. Any firm unable to cover its costs can leave the market without incurring liquidation costs. This assumption implies that there are low start up costs, no sunk costs and no exit costs.Independent decision makingEach MC firm independently sets the terms of exchange for its product.[10] The firm gives no consideration to what effect its decision may have on competitors.[10] The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can act without fear of prompting heightened competition. In other words each firm feels free to set prices as if it were a monopoly rather than an oligopoly.Market powerMC firms have some degree of market power. Market power means that the firm has control over the terms and conditions of exchange. An MC firm can raise its prices without losing all its customers. The firm can also lower prices without triggering a potentially ruinous price war with competitors. The source of an MC firm's market power is not barriers to entry since they are low. Rather, an MC firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product.[11] Market power also means that an MC firm faces a downward sloping demand curve. The demand curve is highly elastic although not "flat".Imperfect informationNo sellers or buyers have complete market information, like market demand or market supply.[12]Market Structure comparison

Number of firmsMarket powerElasticity of demandProduct differentiationExcess profitsEfficiencyProfit maximization conditionPricing power

Perfect CompetitionInfiniteNonePerfectly elasticNoneNoYes[13]P=MR=MC[14]Price taker[14]

Monopolistic competitionManyLowHighly elastic (long run)[15]High[16]Yes/No (Short/Long) [17]No[18]MR=MC[14]Price setter[14]

MonopolyOneHighRelatively inelasticAbsolute (across industries)YesNoMR=MC[14]Price setter[14]

InefficiencyThere are two sources of inefficiency in the MC market structure. First, at its optimum output the firm charges a price that exceeds marginal costs, The MC firm maximizes profits where marginal revenue = marginal cost. Since the MC firm's demand curve is downward sloping this means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by a MC firm means that at its profit maximizing level of production there will be a net loss of consumer (and producer) surplus. The second source of inefficiency is the fact that MC firms operate with excess capacity. That is, the MC firm's profit maximizing output is less than the output associated with minimum average cost. Both a PC and MC firm will operate at a point where demand or price equals average cost. For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firms demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangential to the long run average cost curve at a point to the left of its minimum. The result is excess capacity.[19]Socially undesirable aspects compared to perfect competition Selling costs: Products under monopolistic competition are spending huge amounts on advertising and publicity. Much of this expenditure is wasteful from the social point of view. The producer can reduce the price of the product instead of spending on publicity. Excess Capacity: Under Imperfect competition, the installed capacity of every firm is large, but not fully utilized. Total output is, therefore, less than the output which is socially desirable. Since production capacity is not fully utilized, the resources lie idle. Therefore the production under monopolistic competition is below the full capacity level. Unemployment: Idle capacity under monopolistic competition expenditure leads to unemployment. In particular, unemployment of workers leads to poverty and misery in the society. If idle capacity is fully used, the problem of unemployment can be solved to some extent. Cross Transport: Under monopolistic competition expenditure is incurred on cross transportation. If the goods are sold locally, wasteful expenditure on cross transport could be avoided. Lack of Specialization: Under monopolistic competition, there is little scope for specialization or standardization. Product differentiation practiced under this competition leads to wasteful expenditure. It is argued that instead of producing too many similar products, only a few standardized products may be produced. This would ensure better allocation of resources and would promote economic welfare of the society. Inefficiency: Under perfect competition, an inefficient firm is thrown out of the industry. But under monopolistic competition inefficient firms continue to survive.ProblemsMonopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for products sold in monopolistic competition exceed the benefits of such regulation.[citation needed] . A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market is productively inefficient market structure because marginal cost is less than price in the long run. Monopolistically competitive markets are also allocatively inefficient, as the price given is higher than Marginal cost. Product differentiation increases total utility by better meeting people's wants than homogenous products in a perfectly competitive market.[citation needed]Another concern is that monopolistic competition fosters advertising and the creation of brand names. Advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. Defenders of advertising dispute this, arguing that brand names can represent a guarantee of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive. In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand. The result is that the consumer is confused. Some brands gain prestige value and can extract an additional price for that.Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand.[20]ExamplesIn many markets, such as toothpastes and toilet paper, producers practice product differentiation by altering the physical composition of products, using special packaging, or simply claiming to have superior products based on brand images or advertising.

CAMELS rating systemFrom Wikipedia, the free encyclopediaThe CELS ratings or Camels rating is a supervisory rating system originally developed in the U.S. to classify a bank's overall condition. It's applied to every bank and credit union in the U.S. (approximately 8,000 institutions) and is also implemented outside the U.S. by various banking supervisory regulators.The ratings are assigned based on a ratio analysis of the financial statements, combined with on-site examinations made by a designated supervisory regulator. In the U.S. these supervisory regulators include the Federal Reserve, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Federal Deposit Insurance Corporation.Ratings are not released to the public but only to the top management to prevent a possible bank run on an institution which receives a CAMELS rating downgrade.[1] Institutions with deteriorating situations and declining CAMELS ratings are subject to ever increasing supervisory scrutiny. Failed institutions are eventually resolved via a formal resolution process designed to protect retail depositors.The components of a bank's condition that are assessed: (C)apital adequacy (A)ssets (M)anagement Capability (E)arnings (L)iquidity (also called asset liability management) (S)ensitivity (sensitivity to market risk, especially interest rate risk)Ratings are given from 1 (best) to 5 (worst) in each of the above categories.Contents 1 Development 2 Composite Ratings 2.1 Rating 1 2.2 Rating 2 2.3 Rating 3 2.4 Rating 4 2.5 Rating 5 3 (C)apital Adequacy 3.1 Ratings 4 (A)sset Quality 4.1 Ratings 5 (M)anagement 5.1 Business Strategy / Financial Performance 5.2 Internal Controls 5.3 Other Management Issues 5.4 Ratings 6 (E)arnings 6.1 Ratings 7 (L)iquidity - asset/liability management 7.1 Interest Rate Risk 7.2 Liquidity Risk 7.3 Overall Asset/Liability Management 7.4 Ratings 8 (S)ensitivity - sensitivity to market risk, especially interest rate risk 9 Documents issued by U.S. regulators related to Sensitivity to market risk 10 See also 11 References 12 External linksDevelopmentIn 1979, the Uniform Financial Institutions Rating System (UFIRS)[2] was implemented in U.S. banking institutions, and later globally, following a recommendation by the U.S. Federal Reserve. The system became internationally known with the abbreviation CAMEL, reflecting five assessment areas: capital, asset quality, management, earnings and liquidity. In 1995 the Federal Reserve and the OCC replaced CAMEL with CAMELS, adding the "S" which stands for financial (S)ystem. This covers an assessment of exposure to market risk and adds the 1 to 5 rating for market risk management.[3]Composite RatingsThe rating system is designed to take into account and reflect all significant financial and operational factors examiners assess in their evaluation of an institutions performance. Institutions are rated using a combination of specific financial ratios and examiner qualitative judgments.The following describes some details of the CAMEL system in the context of examining a credit union.[4]Rating 1Indicates strong performance and risk management practices that consistently provide for safe and sound operations. Management clearly identifies all risks and employs compensating factors mitigating concerns. The historical trend and projections for key performance measures are consistently positive. Credit unions in this group resist external economic and financial disturbances and withstand the unexpected actions of business conditions more ably than credit unions with a lower composite rating. Any weaknesses are minor and can be handled in a routine manner by the board of directors and management. These credit unions are in substantial compliance with laws and regulations. Such institutions give no cause for supervisory concern.Rating 2Reflects satisfactory performance and risk management practices that consistently provide for safe and sound operations. Management identifies most risks and compensates accordingly. Both historical and projected key performance measures should generally be positive with any exceptions being those that do not directly affect safe and sound operations. Credit unions in this group are stable and able to withstand business fluctuations quite well; however, minor areas of weakness may be present which could develop into conditions of greater concern. These weaknesses are well within the board of directors' and management's capabilities and willingness to correct. These credit unions are in substantial compliance with laws and regulations. The supervisory response is limited to the extent that minor adjustments are resolved in the normal course of business and that operations continue to be satisfactory.Rating 3Represents performance that is flawed to some degree and is of supervisory concern. Risk management practices may be less than satisfactory relative to the credit union's size, complexity, and risk profile. Management may not identify and provide mitigation of significant risks. Both historical and projected key performance measures may generally be flat or negative to the extent that safe and sound operations may be adversely affected. Credit unions in this group are only nominally resistant to the onset of adverse business conditions and could easily deteriorate if concerted action is not effective in correcting certain identifiable areas of weakness. Overall strength and financial capacity is present so as to make failure only a remote probability. These credit unions may be in significant noncompliance with laws and regulations. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Such credit unions require more than normal supervisory attention to address deficiencies.Rating 4Refers to poor performance that is of serious supervisory concern. Risk management practices are generally unacceptable relative to the credit union's size, complexity and risk profile. Key performance measures are likely to be negative. Such performance, if left unchecked, would be expected to lead to conditions that could threaten the viability of the credit union. There may be significant noncompliance with laws and regulations. The board of directors and management are not satisfactorily resolving the weaknesses and problems. A high potential for failure is present but is not yet imminent or pronounced. Credit unions in this group require close supervisory attention.Rating 5Considered unsatisfactory performance that is critically deficient and in need of immediate remedial attention. Such performance, by itself or in combination with other weaknesses, directly threatens the viability of the credit union. The volume and severity of problems are beyond management's ability or willingness to control or correct. Credit unions in this group have a high probability of failure and will likely require liquidation and the payoff of shareholders, or some other form of emergency assistance, merger, or acquisition.(C)apital AdequacyCA Part 702 of the NCUA Rules and Regulations sets forth the statutory net worth categories, and risk-based net worth requirements for federally insured credit unions. References are made in this Letter to the five net worth categories which are: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized."Credit unions that are less than "adequately capitalized" must operate under an approved net worth restoration plan. Examiners evaluate capital adequacy by assessing progress toward goals set forth in the plan.Determining the adequacy of a credit union's capital begins with a qualitative evaluation of critical variables that directly bear on the institution's overall financial condition. Included in the assessment of capital is the examiners opinion of the strength of the credit union's capital position over the next year or several years based on the credit union's plan and underlying assumptions. Capital is a critical element in the credit union's risk management program. The examiner assesses the degree to which credit, interest rate, liquidity, transaction, compliance, strategic, and reputation risks may impact on the credit union's current and future capital position. The examiner also considers the interrelationships with the other areas: Capital level and trend analysis; Compliance with risk-based net worth requirements; Composition of capital; Interest and dividend policies and practices; Adequacy of the Allowance for Loan and Lease Losses account; Quality, type, liquidity and diversification of assets, with particular reference to classified assets; Loan and investment concentrations; Growth plans; Volume and risk characteristics of new business initiatives; Ability of management to control and monitor risk, including credit and interest rate risk; Earnings. Good historical and current earnings performance enables a credit union to fund its growth, remain competitive, and maintain a strong capital position; Liquidity and funds management; Extent of contingent liabilities and existence of pending litigation; Field of membership; and Economic environment.RatingsCredit unions that maintain a level of capital fully commensurate with their current and expected risk profiles and can absorb any present or anticipated losses are accorded a rating of 1 for capital. Such credit unions generally maintain capital levels at least at the statutory net worth requirements to be classified as "well capitalized" and meet their risk-based net worth requirement. Further, there should be no significant asset quality problems, earnings deficiencies, or exposure to credit or interest-rate risk that could negatively affect capital.A capital adequacy rating of 2 is accorded to a credit union that also maintains a level of capital fully commensurate with its risk profile both now and in the future and can absorb any present or anticipated losses. However, its capital position will not be as strong overall as those of 1 rated credit unions. Also, there should be no significant asset quality problems, earnings deficiencies, or exposure to interest-rate risk that could affect the credit union's ability to maintain capital levels at least at the "adequately capitalized" net worth category. Credit unions in this category should meet their risk-based net worth requirements.A capital adequacy rating of 3 reflects a level of capital that is at least at the "undercapitalized" net worth category. Such credit unions normally exhibit more than ordinary levels of risk in some significant segments of their operation. There may be asset quality problems, earnings deficiencies, or exposure to credit or interest-rate risk that could affect the credit union's ability to maintain the minimum capital levels. Credit unions in this category may fail to meet their risk-based net worth requirements.A capital adequacy rating of 4 is appropriate if the credit union is "significantly undercapitalized" but asset quality, earnings, credit or interest-rate problems will not cause the credit union to become critically undercapitalized in the next 12 months. A 4 rating may be appropriate for a credit union that does not have sufficient capital based on its capital level compared with the risks present in its operations.A 5 rating is given to a credit union if it is critically undercapitalized, or has significant asset quality problems, negative earnings trends, or high credit or interest-rate risk exposure is expected to cause the credit union to become "critically undercapitalized" in the next 12 months. Such credit unions are exposed to levels of risk sufficient to jeopardize their solvency.(A)sset QualityAsset quality is high loan concentrations that present undue risk to the credit union; The appropriateness of investment policies and practices; The investment risk factors when compared to capital and earnings structure; and The effect of fair (market) value of investments vs. book value of investments.The asset quality rating is a function of present conditions and the likelihood of future deterioration or improvement based on economic conditions, current practices and trends. The examiner assesses credit union's management of credit risk to determine an appropriate component rating for Asset Quality. Interrelated to the assessment of credit risk, the examiner evaluates the impact of other risks such as interest rate, liquidity, strategic, and compliance.The quality and trends of all major assets must be considered in the rating. This includes loans, investments, other real estate owned (ORE0s), and any other assets that could adversely impact a credit union's financial condition.RatingsA rating of 1 reflects high asset quality and minimal portfolio risks. In addition, lending and investment policies and procedures are in writing, conducive to safe and sound operations and are followed.A 2 rating denotes high-quality assets although the level and severity of classified assets are greater in a 2 rated institution. Credit unions that are 1 and 2 rated will generally exhibit trends that are stable or positive.A rating of 3 indicates a significant degree of concern, based on either current or anticipated asset quality problems. Credit unions in this category may have only a moderate level of problem assets. However, these credit unions may be experiencing negative trends, inadequate loan underwriting, poor documentation, higher risk investments, inadequate lending and investment controls and monitoring that indicate a reasonable probability of increasingly higher levels of problem assets and high-risk concentration.Asset quality ratings of 4 and 5 represent increasingly severe asset quality problems. A rating of 4 indicates a high level of problem assets that will threaten the institution's viability if left uncorrected. A 4 rating should also be assigned to credit unions with moderately severe levels of classified assets combined with other significant problems such as inadequate valuation allowances, high-risk concentration, or poor underwriting, documentation, collection practices, and high-risk investments. Rating 5 indicates that the credit union's viability has deteriorated due to the corrosive effect of its asset problems on its earnings and level of capital.(M)anagementManagement is the most forward-looking indicator of condition and a key determinant of whether a credit union possesses the ability to correctly diagnose and respond to financial stress. The management component provides examiners with objective, and not purely subjective, indicators. An assessment of management is not solely dependent on the current financial condition of the credit union and will not be an average of the other component ratings.Reflected in this component rating is both the board of directors' and management's ability to identify, measure, monitor, and control the risks of the credit union's activities, ensure its safe and sound operations, and ensure compliance with applicable laws and regulations. Management practices should address some or all of the following risks: credit, interest rate, liquidity, transaction, compliance, reputation, strategic, and other risks.The management rating is based on the following areas, as well as other factors as discussed below.....8 ==Business Strategy / Financial PerformanceThe credit union's strategic plan is a systematic process that defines management's course in assuring that the organization prospers in the next two to three years. The strategic plan incorporates all areas of a credit union's operations and often sets broad goals, e.g., capital accumulation, growth expectations, enabling credit union management to make sound decisions. The strategic plan should identify risks within the organization and outline methods to mitigate concerns.As part of the strategic planning process, credit unions should develop business plans for the next one or two years. The board of directors should review and approve the business plan, including a budget, in the context of its consistency with the credit union's strategic plan. The business plan is evaluated against the strategic plan to determine if it is consistent with its strategic plan. Examiners also assess how the plan is put into effect. The plans should be unique to and reflective of the individual credit union. The credit union's performance in achieving its plan strongly influences the management rating.Information systems and technology should be included as an integral part of the credit union's strategic plan. Strategic goals, policies, and procedures addressing the credit union's information systems and technology ("IS&T") should be in place. Examiners assess the credit union's risk analysis, policies, and oversight of this area based on the size and complexity of the credit union and the type and volume of e-Commerce services' offered. Examiners consider the criticality of e-Commerce systems2 and services in their assessment of the overall IS&T plan.Prompt corrective action may require the development of a net worth restoration plan ("NWRP") in the event the credit union becomes less than adequately capitalized. A NWRP addresses the same basic issues associated with a business plan. The plan should be based on the credit union's asset size, complexity of operations, and field of membership. It should specify the steps the credit union will take to become adequately capitalized. If a NWRP is required, the examiner will review the credit union's progress toward achieving the goals set forth in the plan.Internal ControlsAn area that plays a crucial role in the control of a credit union's risks is its system of internal controls. Effective internal controls enhance the safeguards against system malfunctions, errors in judgment and fraud. Without proper controls in place, management will not be able to identify and track its exposure to risk. Controls are also essential to enable management to ensure that operating units are acting within the parameters established by the board of directors and senior management.Seven aspects of internal controls deserve special attention:1. Information Systems. It is crucial that effective controls are in place to ensure the integrity, security, and privacy of information contained on the credit union's computer systems. In addition, the credit union should have a tested contingency plan in place for the possible failure of its computer systems.2. Segregation of Duties. The credit union should have adequate segregation of duties and professional resources in every area of operation. Segregation of duties may be limited by the number of employees in smaller credit unions.3. Audit Program. The effectiveness of the credit union's audit program in determining compliance with policy should be reviewed. An effective audit function and process should be independent, reporting to the Supervisory Committee without conflict or interference with management. An annual audit plan is necessary to ensure that all risk areas are examined, and that those areas of greatest risk receive priority. Reports should be issued to management for comment and action and forwarded to the board of directors with management's response. Follow-up of any unresolved issues is essential, e.g., examination exceptions, and should be covered in subsequent reports. In addition, a verification of members' accounts needs to be performed at least once every two years.4. Record Keeping. The books of every credit union should be kept in accordance with well-established accounting principles. In each instance, a credit union's records and accounts should reflect its actual financial condition and accurate results of operations. Records should be current and provide an audit trail. The audit trail should include sufficient documentation to follow a transaction from its inception through to its completion. Subsidiary records should be kept in balance with general ledger control figures.5. Protection of Physical Assets. A principal method of safeguarding assets is to limit access by authorized personnel. Protection of assets can be accomplished by developing operating policies and procedures for cash control, joint custody (dual control), teller operations, and physical security of the computer.6. Education of Staff. Credit union staff should be thoroughly trained in specific daily operations. A training program tailored to meet management needs should be in place and cross-training programs for office staff should be present. Risk is controlled when the credit union is able to maintain continuity of operations and service to members.7. Succession Planning. The ongoing success of any credit union will be greatly impacted by the ability to fill key management positions in the event of resignation or retirement. The existence of a detailed succession plan that provides trained management personnel to step in at a moment's notice is essential to the long-term stability of a credit union. A succession plan should address the Chief Executive Officer (or equivalent) and other senior management positions (manager, assistant manager, etc.).Other Management IssuesOther key factors to consider when assessing the management of a credit union include, but are not limited to: Adequacy of the policies and procedures covering each area of the credit union's operations (written, board approved, followed); Budget performance compared against actual performance; Effectiveness of systems that measure and monitor risk; Risk-taking practices and methods of control to mitigate concerns; Integration of risk management with planning and decision-making; Responsiveness to examination and audit suggestions, recommendations, or requirements; Compliance with laws and regulations; Adequacy of the allowance for loan and lease losses account and other valuation reserves; Appropriateness of the products and services offered in relation to the credit union's size and management experience; Loan to share ratio trends and history; Market penetration; Rate structure; and Cost/benefit analysis of major service products.The board of directors and management have a fiduciary responsibility to the members to maintain very high standards of professional conduct:1. Compliance with all applicable state and federal laws and regulations. Management should also adhere to all laws and regulations that provide equal opportunity for all members regardless of race, color, religion, sex, national origin, age, or handicap.2. Appropriateness of compensation policies and practices for senior management. Management contracts should not contain provisions that are likely to cause undue hardship on the credit union. The board needs to ensure performance standards are in place for the CEO/Manager and senior management and an effective formal evaluation process is in place and being documented.3. Avoidance of conflict of interest. Appropriate policies and procedures for avoidance of conflicts of interest and management of potential conflicts of interest should be in place.4. Professional ethics and behavior. Management should not use the credit union for unauthorized or inappropriate personal gain. Credit union property should not be used for anything other than authorized activities. Management should act ethically and impartially in carrying out appropriate credit union policies and procedures.RatingsA management rating of 1 indicates that management and directors are fully effective. They are responsive to changing economic conditions and other concerns and are able to cope successfully with existing and foreseeable problems that may arise in the conduct of the credit union's operation.For a management rating of 2, minor deficiencies are noted, but management produces a satisfactory record of performance in light of the institution's particular circumstances.A 3 rating in management indicates that either operating performance is lacking in some measures, or some other conditions exist such as inadequate strategic planning or inadequate response to NCUA supervision. Management is either characterized by modest talent when above average abilities are needed or is distinctly below average for the type and size of the credit union. Thus, management's responsiveness or ability to correct less than satisfactory conditions is lacking to some degree.A management rating of 4 indicates that serious deficiencies are noted in management's ability or willingness to meet its responsibilities. Either management is considered generally unable to manage the credit union in a safe and sound manner or conflict-of-interest situations exist that suggest that management is not properly performing its fiduciary responsibilities. In these cases, problems resulting from management weakness are of such severity that management may need to be strengthened or replaced before sound conditions can be achieved.A management rating of 5 is applicable to those instances where incompetence or self-dealing has been clearly demonstrated. In these cases, problems resulting from management weakness are of such severity that some type of administrative action may need to be initiated, including the replacement of management, in order to restore safe and sound operations.(E)arningsThe continued viability of a credit union depends on its ability to earn an appropriate return on its assets which enables the institution to fund expansion, remain competitive, and replenish and/or increase capital.In evaluating and rating earnings, it is not enough to review past and present performance alone. Future performance is of equal or greater value, including performance under various economic conditions. Examiners evaluate "core" earnings: that is the long-run earnings ability of a credit union discounting temporary fluctuations in income and one-time items. A review for the reasonableness of the credit union's budget and underlying assumptions is appropriate for this purpose. Examiners also consider the interrelationships with other risk areas such as credit and interest rate.Key factors to consider when assessing the credit union's earnings are: Level, growth trends, and stability of earnings, particularly return on average assets; Quality and composition of earnings; Adequacy of valuation allowances and their affect on earnings; Adequacy of budgeting systems, forecasting processes, and management information systems, in general; Future earnings prospects under a variety of economic conditions; Net interest margin; Net non-operating income and losses and their affect on earnings; Quality and composition of assets; Net worth level; Sufficiency of earnings for necessary capital formation; and Material factors affecting the credit union's income producing ability such as fixed assets and other real estate owned ("OREOs").RatingsEarnings rated 1 are currently, and are projected to be, sufficient to fully provide for loss absorption and capital formation with due consideration to asset quality, growth, and trends in earnings.An institution with earnings that are positive and relatively stable may receive a 2 rating, provided its level of earnings is adequate in view of asset quality and operating risks. The examiner must consider other factors, such as earnings trends and earnings quality to determine if earnings should be assigned a 2 rating.A 3 rating should be accorded if current and projected earnings are not fully sufficient to provide for the absorption of losses and the formation of capital to meet and maintain compliance with regulatory requirements. The earnings of such institutions may be further hindered by inconsistent earnings trends, chronically insufficient earnings or less than satisfactory performance on assets.Earnings rated 4 may be characterized by erratic fluctuations in net income, the development of a severe downward trend in income, or a substantial drop in earnings from the previous period, and a drop in projected earnings is anticipated. The examiner should consider all other relevant quantitative and qualitative measures to determine if a 4 is the appropriate rating.Credit unions experiencing consistent losses should be rated 5 in Earnings. Such losses may represent a distinct threat to the credit union's solvency through the erosion of capital. A 5 rating would normally be assigned to credit unions that are unprofitable to the point that capital will be depleted within twelve months.(L)iquidity - asset/liability managementAsset/liability management (ALM) is the process of evaluating, monitoring, and controlling balance sheet risk (interest rate risk and liquidity risk). A sound ALM process integrates strategic, profitability, and net worth planning with risk management. Examiners review (a) interest rate risk sensitivity and exposure; (b) reliance on short-term, volatile sources of funds, including any undue reliance on borrowings; (c) availability of assets readily convertible into cash; and (d) technical competence relative to ALM, including the management of interest rate risk, cash flow, and liquidity, with a particular emphasis on assuring that the potential for loss in the activities is not excessive relative to its capital. ALM covers both interest rate and liquidity risks and also encompasses strategic and reputation risks.Interest Rate RiskInterest-Rate Risk - the risk of adverse changes to earnings and capital due to changing levels of interest rates. Interest-rate risk is evaluated principally in terms of the sensitivity and exposure of the value of the credit union's investment and loan portfolios to changes in interest rates. In appraising ALM, attention should be directed to the credit union's liability funding costs relative to its yield on assets and its market environment.When evaluating this component, the examiner considers: management's ability to identify, measure, monitor, and control interest rate risk; the credit union's size; the nature and complexity of its activities; and the adequacy of its capital and earnings in relation to its level of interest rate risk exposure. The examiner also considers the overall adequacy of established policies, the effectiveness of risk optimization strategies, and the interest rate risk methodologies. These policies should outline individual responsibilities, the credit union's risk tolerance, and ensure timely monitoring and reporting to the decision-makers. Examiners determine that the ALM system is commensurate with the complexity of the balance sheet and level of capital.Key factors to consider in evaluating sensitivity to interest rate risk include: Interest-rate risk exposure at the instrument, portfolio, and balance sheet levels; Balance sheet structure; Liquidity management; Qualifications of risk management personnel; Quality of oversight by the board and senior management; Earnings and capital trend analysis over changing economic climates; Prudence of policies and risk limits; Business plan, budgets, and projections; and, Integration of risk management with planning and decision-making.Liquidity RiskLiquidity Risk - the risk of not being able to efficiently meet present and future cash flow needs without adversely affecting daily operations. Liquidity is evaluated on the basis of the credit union's ability to meet its present and anticipated cash flow needs, such as, funding loan demand, share withdrawals, and the payment of liabilities and expenses. Liquidity risk also encompasses poor management of excess funds.The examiner considers the current level of liquidity and prospective sources of liquidity compared to current and projected funding needs. Funding needs include loan demand, share withdrawals, and the payment of liabilities and expenses. Examiners review reliance on short-term, volatile sources of funds, including any undue reliance on borrowings; availability of assets readily convertible into cash; and technical competence relative to liquidity and cash flow management. Examiners also review the impact of excess liquidity on the credit union's net interest margin, which is an indicator of interest rate risk.The cornerstone of a strong liquidity management system is the identification of the credit union's key risks and a measurement system to assess those risks.Key factors to consider in evaluating the liquidity management include: Balance sheet structure; Contingency planning to meet unanticipated events (sources of funds adequacy of provisions for borrowing, e.g., lines of credit, corporate credit union membership, FHLB agreements); Contingency planning to handle periods of excess liquidity; Cash flow budgets and projections; and Integration of liquidity management with planning and decision-making.Examiners will consider the overall adequacy of established policies, limits, and the effectiveness of risk optimization strategies when assigning a rating. These policies should outline individual responsibilities, the credit union's risk tolerance, and ensure timely monitoring and reporting to the decision makers.Examiners determine that the liquidity management system is commensurate with the complexity of the balance sheet and amount of capital. This includes evaluating the mechanisms to monitor and control risk, management's response when risk exposure approaches or exceeds the credit union's risk limits, and corrective action taken, when necessary.Overall Asset/Liability ManagementExaminers will have regulatory concern if one or more of the following circumstances exist:1. An overall asset/liability management policy addressing interest rate risk, liquidity, and contingency funding is either nonexistent or inadequate.2. The board has established unacceptable limits on its risk exposure.3. There is noncompliance with the board's policies or limits.4. There are weaknesses in the management measurement, monitoring, and reporting systems.RatingsA rating of 1 indicates that the credit union exhibits only modest exposure to balance sheet risk. Management has demonstrated it has the necessary controls, procedures, and resources to effectively manage risks. Interest rate risk and liquidity risk management are integrated into the credit union's organization and planning to promote sound decisions. Liquidity needs are met through planned funding and controlled uses of funds. Liquidity contingency plans have been established and are expected to be effective in meeting unanticipated funding needs. The level of earnings and capital provide substantial support for the degree of balance risk taken by the credit union.A rating of 2 indicates that the credit union's risk exposure is reasonable, management's ability to identify, measure, monitor, control, and report risk is sufficient, and it appears to be able to meet its reasonably anticipated needs. There is only moderate potential that earnings performance or capital position will be adversely affected. Policies, personnel, and planning reflect that risk management is conducted as part of the decision-making process. The level of earnings and capital provide adequate support for the degree of balance sheet risk taken by the credit union.A rating of 3 indicates that the risk exposure of the credit union is substantial, and management's ability to manage and control risk requires improvement. Liquidity may be insufficient to meet anticipated operational needs, necessitating unplanned borrowing. Improvements are needed to strengthen policies, procedures, or the organization's understanding of balance sheet risks. A rating of 3 may also indicate the credit union is not meeting its self-imposed risk limits or is not taking timely action to bring performance back into compliance. The level of earnings and capital may not adequately support the degree of balance sheet risk taken by the credit union.Ratings of 4 and 5 indicate that the credit union exhibits an unacceptably high exposure to risk. Management does not demonstrate an acceptable capacity to measure and manage interest-rate risk, or the credit union has an unacceptable liquidity position. Analyses under modeling scenarios indicate that a significant deterioration in performance is very likely for credit unions rated 4 and inevitable for credit unions rated 5. Ratings of 4 or 5 may also indicate levels of liquidity such that the credit union cannot adequately meet demands for funds. Such a credit union should take immediate action to lower its interest-rate exposure, improve its liquidity, or otherwise improve its condition. The level of earnings and capital provide inadequate support for the degree of balance sheet risk taken by the credit union.A rating of 5 would be appropriate for a credit union with an extreme risk exposure or liquidity position so critical as to constitute an imminent threat to the credit union's continued viability. Risk management practices are wholly inadequate for the size, sophistication, and level of balance sheet risk taken by the credit union.(S)ensitivity - sensitivity to market risk, especially interest rate riskSensitivity to market risk, the "S" in CAMELS is a complex and evolving measurement area. It was added in 1995 by Federal Reserve and the OCC [3] primarily to address interest rate risk, the sensitivity of all loans and deposits to relatively abrupt and unexpected shifts in interest rates. In 1995 they were also interested in banks lending to farmers, and the sensitivity of farmers ability to make loan repayments as specific crop prices fluctuate. Unlike classic ratio analysis, which most of CAMELS system was based on, which relies on relatively certain, historical, audited financial statements, this forward look approach involved examining various hypothetical future price and rate scenarios and then modelling their effects. The variability in the approach is significant.In June 1996 a Joint Agency Policy Statement was issued by the OCC, Treasury, Fed and FDIC defining interest rate risk as the exposure of a banks financial condition to adverse movements in interest rates resulting from the following:[5] repricing or maturity mismatch risk - differences in the maturity or timing of coupon adjustments of bank assets, liabilities and off-balance-sheet instruments yield curve risk - changes in the slope of the yield curve basis risk - imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar repricing characteristics (e.g. 3 month Treasury bill versus 3 month LIBOR) option risk - interest rate related options embedded in bank productsThe CAMELS system failed to provide early detection and prevention of the devastating Financial crisis of 20072008. Informed and motivated by the large bank failures, and the horrific ensuing crisis, in June 2009 the FDIC announced a significantly expanded Forward-Looking Supervision approach, and provided extensive training to its front line bank examiners. These are the employees of the Division of Supervision and Consumer Protection (DSC) who visit the banks, apply the official guidelines to practical situations, make assessments, and assign the CAMELS ratings on behalf of the FDIC. Since FDIC is a limited insurance pool they are highly concerned with any rise in bank failure rates. In the same timeframe various other regulators began official stress testing of large banks, with the results often publicly disclosed. See Stress test (financial), List of bank stress tests, List of systemically important banks.Sensitivity to market risk can cover ever increasing territory. What began as an assessment of interest rate and farm commodity price risk exposures has grown exponentially over time. Forward-looking Supervision and sensitivity to market risk can include: Assessing, monitoring, and management of any credit concentrations, for example lending to specific groups such as: established commercial real estate lending, or lending for acquisition, development, and construction agricultural lending energy sector lending medical lending credit card lending Exposure to market based price changes, including: foreign exchange commodities equities derivatives, including interest rate, credit default and other types of swapsInflationFrom Wikipedia, the free encyclopediaThis article is about a rise in the general price level. For the expansion of the early universe, see Inflation (cosmology). For other uses, see Inflation (disambiguation).In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.[1] When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money a loss of real value in the medium of exchange and unit of account within the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.[4] The opposite of inflation is deflation.Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.Inflation also has positive effects: Fundamentally, inflation gives everyone an incentive to spend and invest, because if they don't, their money will be worth less in the future. This spending and investment can benefit the economy. Inflation reduces the real burden of debt, both public and private. If you have a fixed-rate mortgage on your house, your salary is likely to increase over time due to inflation, but your mortgage payment will stay the same. Over time, your mortgage payment will become a smaller percentage of your earnings, which means that you will have more money to spend. Inflation keeps nominal interest rates above zero, so that central banks can reduce interest rates, when necessary, to stimulate the economy.[5] Inflation reduces unemployment to the extent that unemployment is caused by nominal wage rigidity. When demand for labor falls but nominal wages do not, as typically occurs during a recession, the supply and demand for labor cannot reach equilibrium, and unemployment results. By reducing the real value of a given nominal wage, inflation increases the demand for labor, and therefore reduces unemployment.Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6] However, money supply growth does not necessarily cause inflation. Some economists maintain that under the conditions of a liquidity trap, large monetary injections are like "pushing on a string".[7][8] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities.[9] However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.[10][11]Today, most economists favor a low and steady rate of inflation.[12] Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[13] The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.[14]