How to tell if your bank is safe or in trouble (maybe).
Posted on | December 20, 2009 |
While it seems that bank failures have slowed compared to the end of 2008 and into 2009, we could be in for another bout if the commercial credit market is as bad as some analysts fear.
But how do you know if your bank is safe?
Well, the real answer is you don’t.
You can only ever know for sure that your bank wasn’t safe after it’s been in trouble or failed completely.
But that doesn’t mean you can’t get some idea of the relative strength of a given bank compared to its peers.
This is where the bank ratings search from BankRate comes into play. This search tool allows you to view you bank’s “Safe & Sound® Rating” as well as its financial statements and other information.
Ratings
BankRate’s Safe & Sound® rating is based on a measure of an institution over 22 different tests that target Capital adequacy,Asset quality,Profitability, and Liquidity.
The rating system is an intuitively simple star based rating:
| ***** | Superior |
| **** | Sound |
| *** | Performing |
| ** | Below peer group |
| * | Lowest rated |
Additional ratings:
Not Rated “NR” – Complete data not available
Closed – Institution is closed
G – Designates high growth
The best banks will rate 5 stars, and the worst get 1 star. Most banks fall into the 3 - 4 star range. Only the best get 5 stars.
Statements and reports
In addition to the star rating system, you also get a report that covers the last 4 quarters or more of financial data, which includes:
- analysis of earnings which examines profitability, component contributions to current year results and prior year performance.
- a review of asset quality which focuses on non-performing asset levels, loss reserve coverage, category risk and loan yield.
- an analysis of capital trends, adequacy, quality and durability, liquidity and interest rate risk.
- a summary of organizational information and historical financial data.
- a separate financial summary section, including a balance sheet and operating and ratio data.
A lack of a report is not a sign of a bad financial institution, but rather a lack of data. The bank may not have been open long enough to have filed the required 4 quarters of data. These institutions typical get an “NR” rating as they are too new to rate meaningfully.
Banks with asset growth of over 25% during the previous 12 month period are considered “high growth” and will get a “G” modifier next to the star rating.
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