Wouldn't it be fun to know which of the 8500 banks in the US are strong and which are weak?
Imagine, if you will, that the stock price of all the banks that are publicly traded were out of sync with the way that bank examiners and senior executives of the bank actually rated their performance? Imagine that a bank that looks strong to the public, based upon publicly available information was in fact startlingly weak and that disclosure of the information to bank examiners was the only thing that kept consumers from making a run on that bank?
Well you don't have to imagine because it's already been imagined. Actually, it has been realized on a need-to-know basis. And guess who doesn't need to know? You, peasant!
But I'm helping you know, because there are other ways of knowing things by recognizing the actions of people who actually know.
Several academic studies have examined whether and to what extent private supervisory information is useful in the supervisory monitoring of banks. With respect to predicting bank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling for a wide range of publicly available information about the condition and performance of banks. Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings contain useful information, it decays quickly. For the period between 1988 and 1992, they find that a statistical model using publicly available financial data is a better indicator of bank failure than CAMEL ratings that are more than two quarters old.
Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks' current conditions. They find that, conditional on current public information, the private supervisory information contained in past CAMEL ratings provides further insight into bank current conditions, as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to 1995, the private supervisory information gathered during the last on-site exam remains useful with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn from academic studies is that private supervisory information, as summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions.
Academics are people who know but have no money to put where their mouths are. I like the way that Taleb deals with them, but that's merely tangential here. My point is that CAMEL ratings exist and they would add clarity to our issues of ringfencing troubled banks, except that you and I cannot see them.
Last time I checked, I heard there was a shortage of bank examiners. Hmmm. I wonder how much that pays.