Bank Rating

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DEFINITION

Ratings provided to the public by the Federal Deposit Insurance Corporation (FDIC), and/or other private companies on the safety and soundness of banks and thrift institutions. A bank rating will usually assign a letter grade or numerical ranking based on proprietary formulas. These formulas are typically based on capital, asset quality, management, earnings, liquidity, and sensitivity to market risk (CAMELS).

INVESTOPEDIA EXPLAINS

The CAMELS rating is assigned by government regulators on a scale of 1 to 5, with 1 and 2 being assigned to financial institutions that are in the best fundamental condition. A rating of 4 or 5 often indicates serious problems that require immediat action or careful monitoring. A rating of 5 is given to an institution that has a high probability of failure within the next 12 months.

The CAMELS rating is never relased to the public, and is kept confidential. For this reason, the private bank-rating companies use proprietary formulas in an attempt to replicate it. Because no rating service is identical, investors and clients should consult multiple ratings when analyzing their financial institution.


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