The term "Bank Rating" refers to a letter grade or numerical ranking assigned to certain financial institutions by the Federal Deposit Insurance Corporation (FDIC) and credit rating agencies. Bank ratings are given to banks and other thrift institutions. Grades are assigned in order to provide the public with information about an organization's safety and soundness. They also help bank leaders identify problems within their institution, if any, that need to be addressed. Many agencies and companies use a proprietary formula to determine ratings while others use the CAMELS system which assesses these financial institutions according of six factors: Capital adequacy, Asset quality, Management competence, Earnings trends, Liquidity position and Sensitivity of earnings/capital position due interest rate changes . Ratings can range from AAA (highest) down through D (lowest).A bank's rating is important because it can affect that particular institution's ability to borrow money, receive deposits, and expand its business. In addition, bank ratings may also influence an individual consumer's decision on whether or not they should do business with a particular bank. A high rating from the FDIC or one of the credit rating agencies typically indicates that a financial institution is in good shape while a low rating usually means there are some concerns that need addressing..There are several different grades or rankings that can be assigned to banks: excellent, satisfactory, needs improvement, substantial noncompliance (or "substandard"), highly vulnerable (or "poor"), and critically deficient (or "very poor"). The most common grading system used by both the FDIC and credit raters is A through D scale where 'A' is excellent/superior quality; 'B' is good quality; 'C' reflects adequate quality; 'D' represents below-adequate quality/failure).Banks take their ratings seriously as they can impact an institution's ability raise money from depositors or borrow money in the wholesale markets at lower rates. In addition, bank ratings may also affect how much insurance coverage depositors receive from FDIC if the bank fails. For this reason it is important for consumers as well as regulators that understand what each rating means so they can make informed decisions when it comes time banking products or services.
