what is a bank rating 
a bank rating refers to a letter or numerical grade assigned to banks and thrift institutions by rating agencies grades are assigned to provide the public with information about an organization s level of credit risk and financial safety and soundness they also help bank leaders identify problems within their institution if any that need to be addressed 1many rating agencies use a proprietary formula to determine ratings while others use the camels system to assess financial institutions understanding bank ratingsregulatory and credit rating agencies assign ratings to banks in order to provide the public with information about the safety and soundness of a financial institution or its risk of default on debt obligations these ratings are issued by regulatory bodies such as the federal deposit insurance corporation fdic and credit rating agencies like standard poor s s p moody s and fitch ratings are updated on a regular basis by bank supervisors normally every quarter 1ratings give consumers insight into the health and stability of financial institutions such as banks and other thrift institutions these rankings are also provided to the bank s management team and its board to address any problems if any grades can be based on a series of factors including the capital amounts liquidity asset quality and the capability of management 1agencies may use different ratings system they may consider the workings of such systems proprietary and maintain confidentiality about how ratings are derived the fdic is an independent government agency that protects depositors money in fdic insured banks up to a certain amount in the event that a financial institution fails it regularly examines financial institutions to ensure financial safety and soundness its ratings are different from those provided by credit rating agencies which focus on the ability of financial institutions and corporations to pay debt obligations on time for instance the fdic presents ratings related to the level of consumer compliance with consumer protection and civil rights statutes regulations that it finds at each federally regulated commercial bank savings and loan association mutual savings bank and credit union 2it also provides ratings relating to the safety and soundness of these financial institutions 2government regulators assign ratings based on the camels system which is used worldwide to provide guidance about the financial soundness of financial institutions the letters in the acronym camels stand for capital adequacy asset quality management earnings liquidity and sensitivity 1the fdic safety and soundness ratings use a scale of 1 to 5 where 2example of how to interpret credit ratingsbank customers and investors can visit a credit rating agency site to learn about its ratings structure and the meaning of its individual ratings for example fitch rates banks with letters and numbers in september 2022 it assigned bank of america corporation a rating of aa for the category of long term issuer default and an f1 rating for the category of short term issuer default 3according to fitch aa ratings denote expectations of very low default risk they indicate very strong capacity for payment of financial commitments this capacity is not significantly vulnerable to foreseeable events 4the f1 rating indicates the lowest default risk and the greatest ability to meet timely payments of financial obligations to financial institutions in the same country fitch appends the sign when a bank s liquidity is particularly strong 5because no rating service is identical or infallible investors and clients should consult multiple ratings and financial metrics when analyzing their financial institutions components of camelsas stated above many agencies use camels or similar criteria to rate banks here is what the camels system helps agencies examine 1capital adequacy refers to the amount of cash held in reserve by financial institutions compared to what authorities require them to hold institutions must also address guidelines and regulatory policies related to interest and dividends 6this entails an evaluation of credit risk associated with a bank s interest bearing assets such as loans rating organizations may also look at whether a bank s portfolio is appropriately diversified they may look for policies that limit credit risk and support the efficiency of operations by reviewing the management team an agency wants to examine whether a bank s leaders understand the direction of the institution and have specific plans to move forward in a given regulatory environment visualizing what is possible placing a bank in context with industry trends and taking risks to grow the business are all required of strong leaders bank financial statements are often harder to decipher than those of other companies given their distinct business models banks take deposits from savers and pay interest on some of these accounts to generate revenues they will take deposits loan them to borrowers and receive interest on them their profits are derived from the spread between the rate they pay for funds and the rate they receive from borrowers ratings take into account liquidity or a bank having enough assets of a type that can be converted to cash quickly and easily so that short term financial obligations can be met those obligations include withdrawals by customers sensitivity refers to an institution s risk exposure for instance market risk for example a regulator may examine how a bank monitors its credit concentrations and the industries to which it lends money 