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There are thousands of banks and other financial institutions in the U.S., and consumers have a variety of choices for where to keep their money. Bank health ratings are one tool that people can use to identify where they should invest their assets. Several government and non-government agencies issue bank health ratings based on a number of criteria and various ranking systems.
It can be a good idea to make sure any financial institution where you are considering depositing your money has a good bank health rating. Here, learn more about how to do this.
Key Points
• Bank ratings assess the financial health and creditworthiness of financial institutions, helping consumers decide where to keep their money and whether to switch banks.
• Agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve use the CAMELS system to evaluate banks across six criteria, including capital and liquidity.
• Private credit rating agencies, such as Fitch Ratings, Moody’s, and Standard & Poor’s, also assign creditworthiness ratings using their own scales.
• While bank ratings offer transparency into a bank’s safety, most U.S. banks are actively supervised and considered healthy.
• Deposits at banks insured by the FDIC are protected up to standard limits in the event of a bank failure.
What Are Bank Ratings?
Bank ratings express how healthy and reliable a financial institution is. A solid number can inspire you to feel confident about opening accounts with a particular bank.
The Federal Deposit Insurance Corporation (FDIC), created in 1933 in the wake of the Great Depression, is one of the primary governmental agencies that oversees banking in the U.S.. The entity examines and supervises financial institutions for safety and soundness, as well as the enforcement of bank regulations. It is one of the primary entities responsible for rating banks.
The FDIC, however, is not the only company that evaluates banks. There are other groups that give banks creditworthiness ratings, such as Standard & Poor’s, Fitch, and Moody’s.
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How Bank Ratings Are Calculated
There are a number of different ways bank ratings are calculated, depending on the institution doing the rating. The Federal Reserve, FDIC, and other governmental financial agencies use the CAMELS system, ranking bank health and safety on six different criteria:
• (C)apital adequacy
• (A)sset quality
• (M)anagement
• (E)arnings
• (L)iquidity
• (S)ensitivity to market risk
The FDIC’s Safety and Soundness scale, for example, rates factors from 1 to 5, with 1 being the highest (strong) and 5 being the lowest (critically deficient).
Other companies use their own proprietary ratings systems. For example, Fitch uses a combination of letters and numbers for its credit-worthiness evaluations, assigning ratings such as F1+ for short-term scores (in this system, an F is actually good) and AA for long-term scores.
Bank Safety and Soundness Ratings
Government and credit rating agencies have developed rating systems in order to vet the safety and soundness of banks, including any specific issues that could pose a credit risk.
A bank’s safety and soundness may be determined by a combination of several different factors that make up its overall health and viability. Often, a critical factor for this is evaluating how well the bank can handle economic fluctuations.
Bank Health Ratings
One aspect of bank ratings is how healthy a bank is. This can include factors such as the amount of liquidity it has relative to its total customer deposits, as well as how secure its upper management structure is.
Bank Safety Ratings
Another facet to consider is the safety of a given bank. While a bank’s health and safety are correlated, they are not quite the same thing. The FDIC and NCUA (National Credit Union Administration insure deposits at most banks and credit unions, respectively, in the U.S. in the rare instance of a bank failure. This means the money in your checking account and other types of deposit accounts would be covered up to the limits in place.
Recommended: FDIC vs SPIC: What’s the Difference?
Why It’s Important for Your Bank to Be Healthy
Broadly speaking, the health of U.S. banks is an important factor in the overall health of the economy, which is one reason they’re carefully monitored. Credit ratings can also be a vital measure for both potential investors and consumers. For example, the safety of checking accounts is something to be aware of when banking.
However, it may not be the only thing you consider when opening up a new account. The interest rate a financial institution pays on deposits, how convenient it is to bank there, and its overall account features are probably more important for most people.
Because the U.S. government (through the Federal Reserve and the FDIC) takes an active role in supervising the banking industry, most of the major banks you might consider are likely to be sufficiently healthy. However, you may want to do your own research to make sure.
Checking Your Bank’s Rating
It’s important to feel confident that your money is secure with the bank you choose — nobody wants to put their money somewhere where it might not be safe. Fortunately, the U.S. government actively supervises banks for their safety and soundness and the possibility of credit risk.
Before opening a checking or savings account, you might want to find out your bank’s creditworthiness rating. You can search for this at the Fitch Ratings website. Government agencies such as the Federal Reserve and the FDIC, however, do not publish their ratings, and other rating agencies may limit access to their rating information to paid subscribers.
Bank FDIC Insurance
Bank ratings are important for transparency in the health of any bank as well as for providing insight into issues that may need to be resolved. But it’s also important to know that most banks are insured by FDIC. Deposits at FDIC-insured banks are insured for up to $250,000 per depositor, per account ownership category (such as single, joint, or trust account), per insured institution. So, your money is guaranteed up to those limits by the U.S. government in the very unlikely event that your bank fails.
What’s more, if you do have more than $250,000 in a bank, some financial institutions have extended insured deposit programs. This allows them to insure a higher amount by partnering with other banks to hold your funds, with no single account topping the $250K figure.
The Takeaway
Before deciding on a financial institution, it’s worth checking out its financial health and safety ratings. Once you’ve done this, the next step is choosing an account that meets your financial needs.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is a good health rating for a bank?
Different rating agencies have different scales for rating how safe and sound a bank is. The CAMELS ratings used by government agencies range from 1 (strong) to 5 (critically deficient), while Moody’s ratings range from Aaa at the top level to C at the low end.
How do you find out the rating of a bank?
You can check Fitch Ratings’ website to find out a bank’s creditworthiness rating, but otherwise, you may not be able to access this kind of data. The government agencies that evaluate banks do not make their ratings public, and some other private agencies may only publish their ratings to paid subscribers.
Who rates banks?
The FDIC and Federal Reserve are two government agencies that oversee financial regulations for banks and financial institutions. These agencies use the CAMELS ratings to help assess how secure and healthy U.S. banks are. Other credit agencies, such as Standard & Poor’s, Fitch, and Moody’s, also rate banks using their proprietary rating systems.
Are CAMELS ratings public?
CAMELS ratings issued by the government are not part of public record. In fact, the CAMELS rating of any particular bank, as well as its examination report, may not be disclosed to unauthorized users. Other institutions may disclose or publicize their own bank ratings, which are often calculated based on data that is publicly available.
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