Bank Rating

What is Bank Rating?

Definition

Bank rating is a set of numerical or alphabetical ranking of banks, thrift, and other financial management organizations by Federal deposit insurance or private companies. It provides these institutions surety, security, and soundness based on a formula derived by the FDIC.

The formula was developed from analysis of capital, asset quality, management, earnings, liquidity, and sensitivity to market risk of these institutions. These criteria are commonly referred to as CAMELS.

Rating

The rating of the FDIC runs on a scale of 1 to 5. The strong and sound institutions earn the 1st and 2nd   ratings while weak and less-promising firms are assigned a 4th or 5th ranking which implies a serious problem and a likelihood of falling apart within a period of 1 year.

Criteria

The CAMELS criteria are not usually announced or revealed to the public hence this makes ratings generated from various financial institutions unidentical because the parameters used for their ratings may be different.
C- Capital analysis refers to the cash flow pattern of income, and asset yields while A - stands for asset quality, which involves a bank’s interest-bearing assets such as loans and the evaluation of the credit risk associated with them.

M is for management which tests a leader’s ability to pursue a firm’s mission/plans while moving forward within a regulatory environment amidst competition while boosting earnings-E derived mainly from interest loans. L- Liquidity, and S-sensitivity to market risk which describes how quickly assets can be bought or sold, and transactions made at minimum market risks.