DEFINITION of 'Adversely Classified Asset'

A type of loan classification in which the loan or other asset is considered, to some degree, to be impaired. It is an asset that is considered by bank examiners to be of substandard credit quality and whose full repayment of principal and accrued interest is questionable.

BREAKING DOWN 'Adversely Classified Asset'

According to the Risk Management Manual of Examination Policies used by the FDIC, adversely classified loans fall into three categories: substandard, which are unduly risky and, if unimproved, may be a future hazard; doubtful, whose collection is highly questionable and improbable; and loss, which are considered noncollectable.

Besides stating the amounts of adversely classified assets in each category, bank examiners also typically compute the ratio of adversely classified assets to total assets and the ratio of adversely classified loans to total loans.

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