Explain the CAMELS approach to bank analysis, which covers capital adequacy, quality of assets, management, earnings, liquidity and sensitivity, with its main ratios and its limitations

CAMELS rates six areas. Capital adequacy uses CET1, Tier 1 and total capital ratios over risk-weighted assets. Asset quality looks at non-performing loans relative to total loans, the allowance for loan losses relative to non-performing loans, and provisions relative to net charge-offs. Management capability covers governance, controls and risk management. Earnings looks at the net interest margin, cost to income and how much profit depends on volatile trading or on releases of loan loss reserves. Liquidity uses the liquidity coverage and net stable funding ratios and loan-to-deposit levels. Sensitivity to market risk examines repricing gaps and value at risk. Limitations include ignoring government support, culture and off-balance-sheet risk, and weighting components arbitrarily.