Chartered Financial Analyst (CFA) Practice Exam Level 2

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Which of the following is NOT a component of the CAMELS framework?

Market Risk
Asset Quality
Management Quality
Liquidity

The correct answer is: Market Risk

The CAMELS framework is a system used to measure the soundness of financial institutions, particularly banks. It consists of six components: Capital Adequacy, Asset Quality, Management Quality, Earnings, Liquidity, and Sensitivity to Market Risk. In this context, market risk is indeed included in the framework but it is wrapped into the sensitivity component, which assesses how a bank's earnings are affected by changes in interest rates and other macroeconomic factors. The framework specifically does not list "Market Risk" as a standalone component; instead, it integrates that risk into the broader metric of Sensitivity to Market Risk. Therefore, identifying “Market Risk” as a component leads to the conclusion that it is not categorically defined as a component on its own within the CAMELS framework.