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A bank rating is a number assigned to a bank that indicates its financial safety and strength. Government agencies rate banks to ensure the solvency of financial institutions. The U.S. adopted an official system of analyzing and rating banks based upon various factors. These factors are capital, asset quality, management, earnings, liquidity, and sensitivity to risk (CAMELS).
Since various methods and factors can be used to rate banks, a uniform system became necessary. The U.S. authorized the Federal Financial Institutions Examination Council (FFIEC) to adopt uniform standards to analyze and assess those institutions. The FFIEC chose the system based on the CAMELS factors. Various private and federal agencies use the CAMELS bank rating to supervise U.S. banks.
The Federal Deposit and Insurance Corporation (FDIC), for example, example banks using CAMELS. The FDIC is a government agency responsible for insuring and monitoring U.S. banks. The FDIC requires banks to submit reports periodically. This allows the FDIC to evaluate the information and make a bank rating. The FDIC, however, does not release a bank rating to the public.
A CAMELS bank rating uses a numerical ranking from one to five. A number one ranking reflects a positive rating and a five indicates a negative rating. To illustrate, the FDIC would assign a number to each of the factors in CAMELS for a bank. It would then average the rankings for each factor; the result is the overall bank rating. A rating of one or two indicates no solvency issues while a rating of three or more indicates that the bank has moderate to severe problems.
The FDIC does not base a bank rating solely on the reports a bank submits. It makes onsite visits to look at the books and verify information. Bank examiners may gather additional information concerning problems with loans and information concerning compliance with banking regulations. A bank is also required to correct any problems that the FDIC identifies.
In addition to the FDIC, the Office of the Comptroller of Currency (OCC) relies on the rating system of CAMELS to supervise U.S. banks. The OCC is empowered to enforce laws regulating national banks. It also establishes regulations for the operations of national banks.
Since the FDIC does not disclose a bank rating, private bank-rating firms have emerged. These companies have developed different formulas for rating banks. The various private companies that rate banks do not disclose their methods of evaluating banks because the methods are proprietary.