Bank Ratings: What They Are and Why They Matter (2024)

Trust is critical when choosing a bank to do business with—especially when relying on that bank for your company’s business. Much like a credit rating informs lenders about the creditworthiness of people and business entities, bank ratings score financial institutions' health, stability, and risk level.

What is a bank rating?

A bank rating is a helpful measurement for customers to know how safe it is to do business with a particular bank.

A bank rating is interpreted through a letter or numerical rank that is assigned to the financial institution. These ratings are used by investors, issuers of debt, investment banks, businesses and corporations.

Bank ratings are assigned to inform the public about an organization's stability and security. They also help banking leaders identify and address issues within their institutions. Because regulatory and credit rating agencies use different methods to calculate ratings, it’s wise to consult multiple ratings when analyzing financial institutions.

Here are a few examples of how bank ratings can take shape.

Banks with an AAA rating are considered the lowest risk and highest quality, with AA clocking in slightly less. BBB and below represent a moderate risk, and so on.

Government agencies rate banks on a number system from one to five, with one being the best and five indicating a significant possibility that the bank will fail in the short term. FDIC insurance can protect your deposits in the case of a bank default, but uninsured funds can take months or years to recover.

Why a bank rating matters

Before entrusting your money to a bank, it’s always advisable to check its rating. Like due diligence on new vendors or background checks on employees, it is important for businesses to verify the bank they want to work with is in good standing.

As a business owner, you have a lot on your plate, and it’s critical to choose partners you can count on so you can focus on what you do best.

The right financial institution can be a powerful and strategic ally, as it can provide products and services—such as loans, lines of credit, and credit cards—that help you grow and advance your business goals.

Financial institutions with high ratings may offer

  • better lending rates
  • higher interest on an online savings account
  • more competitive banking fees

A good relationship with a quality bank can also help you look better to investors. If you ever decide to sell or take your company public, you’ll be able to obtain the best possible valuation.

The right bank will also advocate for you, counsel you on improving your financial outlook, and connect you with outside services based on your objectives and stated business goals.

How are bank ratings calculated?

Bank ratings are determined by several factors, including the bank’s capitalization, asset quality, earnings, and liquidity. One common third-party bank credit rating system, Moody’s, uses a letter-grade system ranging from AAA (the highest) to D (the lowest rating).

Other bank credit rating agencies include Standard & Poor’s (also known as S&P Global, an index often cited in financial news as the S&P 500 and Fitch ratings. The Federal Deposit Insurance Corporation (FDIC) issues a bank rating on a scale of one to five, with one being the best possible rating and five the lowest.

The FDIC calculates these ratings based on the CAMELS rating system, which considers six factors. Here is the CAMELS rating system explained:

1. C is for capital adequacy

Monitoring your bank’s ratings over time is recommended as it helps you understand how a particular bank is faring relative to others.

2. A is for assets/asset quality rating

This factor measures the quality of a bank’s loans based on market risk and credit relative to assets generated. A bank’s risk is lower when they loan to corporations with excellent credit ratings. Since loans are a primary source of bank income, this is a critical bank rating attribute.

3. M is for management capability

Assessing a bank’s ability to manage daily operations and adapt to market conditions to manage investment risk. Compliance with federal guidelines is also a mitigating factor.

Examiners will look at the bank’s plans over time and identify risks related to audits, accounting practices, information systems, record keeping, computer security and data integrity, documentation, and adherence to policies.

4. E is for earnings

Much like a lender looks at your business plans for the future before they approve your loan, a bank needs to be able to show earnings to support growth and maintain competitiveness.

A CAMELS examiner will consider a bank’s net interest margin (NIM), earnings stability, returns on assets (ROA), and potential future earnings in the event of challenging economic conditions. Core earnings are the most critical aspect here as they represent long-term stability.

5. L is for liquidity

A bank’s liquidity identifies assets that can quickly be converted to cash, indicating its ability to meet financial obligations in the short term, such as withdrawals from customer deposits.

Examiners look at both the amount and the quality of a bank’s liquid assets, comparing these to its short-term commitments.

6. S is for sensitivity

Sensitivity refers to how susceptible a bank’s earnings are to various risk factors. This data is compared across industries and leveraged to determine how lending within specific industries can impact a bank’s credit risk.

How does a bank rating work?

According to S&P, a bank rating is an informed opinion. Bank ratings also provide a common language for investors and financiers worldwide to provide a consistent, standardized assessment of a bank’s fiscal health.

Generally, bank ratings consider various factors, including financial stability over time, capitalization levels, asset quality, and earnings. Bank ratings also account for the bank’s ability to withstand economic stress, the strength of its management team, and governance.

In considering this data, rating agencies can accurately assess the financial institution’s overall health. Consumers and businesses can then use the information to make informed decisions about where to put their money.

Review bank ratings regularly

Bank ratings can also be affected by circ*mstances other than internal banking practices. External events, such as global economic conditions, are mitigating factors that can affect a bank rating. The years following 2020 are an excellent example of this.

During this time, many people and businesses faced financial hardship due to widespread shutdowns amid the global pandemic. Loans and mortgages either defaulted or were deferred. Companies failed, and entire industries underwent significant disruption, sometimes to the point of near-obsolescence. Events such as these could be devastating to banks that were already in weakened positions. All told, only four banks failed in 2020, and none have since.

Benefits of working with a high-rated financial institution

Bank ratings are issued by the Federal Deposit Insurance Corporation (FDIC) and credit rating agencies to provide consumers and businesses with information about an organization’s financial health.

So, when you’re looking for a new bank, be sure to check the rating first. While a bank rating is by no means the only variable that matters, it’s a critical indicator of what you can expect. Here are three excellent reasons to choose a bank with a high rating:

1. Earn more on your savings

A higher-rated bank is more likely to offer competitive interest rates on deposits, which means you’ll earn more on your savings accounts.

2. Better service

A bank rating reflects its overall stability. High ratings mean your financial institution is less likely to experience problems that could disrupt your banking experience. Some examples include anything from ATM outages to long wait times at the teller window, insufficient access to financial advice, or poor customer service in general.

3. Peace of mind

Knowing your financial institution is strong and stable gives you peace of mind in an uncertain world—and that’s a priceless commodity these days.

What to know about bank reviews online

Bank reviews and bank ratings are often confused as one and the same. However, reviews are generally posted by third parties outside the banking system, i.e. a bank customer. As such, they apply a totally different ranking system.

Where online reviews are concerned, a score of five is high, and one is low. With bank ratings, on the other hand, five is the lowest, and one is the best.

All that is to say, both indices are informative and worth considering. While a bank rating is an official industry rank based on financial performance, online bank reviews look at variables that concern bank customers, such as services, rates, fees, access, customer service, technology, and innovation—in addition to the bank’s rank.

How to find bank ratings

The best way to check ratings for business banks and other financial institutions is to go right to the source.

Fitch Ratings

Fitch Ratings provides a searchable database of all banks, credit unions, and financial institutions worldwide. Their listings also indicate when it was last ranked and whether the rank has been recently downgraded.

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation’s database contains information on all federally registered banks and financial institutions. It also offers statistics on the industry and reports on individual entities.

In the case of S&P and Moody’s, you’ll need to create an account to access detailed rating information. However, industry data is compiled using similar methodologies and is generally aligned with Fitch and FDIC evaluations.

What financial institutions have the best ratings?

Choosing the best bank means deciding what’s best for your financial needs. It’s a good idea to pick a few contenders and see how they compare in terms of services, rates, fees, and access.

Don’t limit yourself to one or two review sites, either. Once you start your search, you’ll undoubtedly notice some consistency from site to site.

As with any business decision, knowledge is power—and in this case, it’s a power that can help you build strong, resilient foundations to grow a business on.

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Bank Ratings: What They Are and Why They Matter (2024)


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