Academic journal article ABA Banking Journal

Guess Who's Rating Your Bank? Besides the Regulatory Agencies, One or More of Six Private Companies Keep Tabs on You. What You Don't Know Could Hurt You. (Bank Management)

Academic journal article ABA Banking Journal

Guess Who's Rating Your Bank? Besides the Regulatory Agencies, One or More of Six Private Companies Keep Tabs on You. What You Don't Know Could Hurt You. (Bank Management)

Article excerpt

As business decisions go, it seemed like an obvious one for Ron Kukes.

It was the summer of 2001 and a corporate customer of Kukes' bank--First Interstate Bank of Alaska, which has since changed its name to Alaska Bank & Trust--had just sold a business and wanted to make a short-term $50 million deposit. Kukes, the bank's president and chief executive officer, jumped at the chance to make a nice spread investing the funds in government securities, providing a "good, one-time shot in the arm." Just to be safe, he even ran the idea past his regulators at the Office of the Comptroller of the Currency, who didn't object.

What happened next is every banker's worst nightmare. Unbeknownst to Kukes, the Anchorage-based bank was later evaluated for safety and soundness by Weiss Ratings Inc., something Weiss does every quarter using data from call reports that all banks must file with the Federal Deposit Insurance Corp. With just $60 million in assets, the large deposit nearly doubled the bank's balance sheet while cutting its all-important capital ratios significantly. These changes were fed through the highly automated system that Weiss uses to analyze banks and thrifts, and in January the bank's safety and soundness rating was dropped from a "C" to a "D."

And this is when Kukes' problems really started. The Anchorage Daily News soon got wind of the downgrade and sent out a reporter who knew relatively little about banking--he normally covered the commercial fishing industry--to investigate. The newspaper ended up running an alarmist--and misleading--story that cost the bank some local business. Kukes eventually got the mess straightened out, but he's still ticked off and holds Weiss partly to blame. "Any rating agency that sees a blip like that should at least have the courtesy to call the bank and get an explanation for it," he says.

CAMELS without eyes

Alaska Bank & Trust's close encounter with a rating agency provides a cautionary tale that all banks should pay close attention to. Including Weiss, there are six privately held firms that analyze quarterly call report data to provide safety and soundness ratings on every bank in the country. (Capsulized descriptions of these firms with contact information appear in the article below. The firms are also listed on the FDIC's website,

Many banks might not even be aware that firms such as Weiss are evaluating their call report data and putting out ratings--but they need to be. As Kukes' experience shows, a downgrade can quickly lead to trouble and it's crucial that bankers understand how these firms work--and what to do when something goes wrong.

While their classification systems vary, most of the firms use analytical formulas that draw heavily on the same rating methodology used by federal and state regulators when assessing the soundness of financial institutions. Commonly referred to as the CAMELS rating system, this approach looks at six separate components: capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. Each component is further broken down into a variety of factors that the regulators consider when examining a depository institution, which is given a separate rating for each category. The bank is also assigned a composite rating that takes all six components into consideration.

The only CAMELS component rating firms don't try to duplicate is a first-hand evaluation of management. Unlike the regulators, rating firms don't conduct any part of their analysis onsite. "We're an offsite sensing mechanism," says Mike Heller, president at Veribanc, another rating company. "We don't have the luxury of sending an auditor in." Instead, each firm uses a highly automated process that relies on a small team of analysts and systems personnel and normally requires little human intervention. …

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