Beyond CAMELS

THE NATION’S FIRST BANK RATING SERVICE

FREQUENTLY ASKED QUESTIONS


“The danger comes in an economic downturn, when delinquency and charge-off rates can double or triple and could push a bank toward insolvency, says VERIBANC®.”

Broadly stated, banking risk is the probability that anyone dealing with a financial institution will have problems due to the financial weakness or regulatory difficulties at that institution.

FAQs:

1) Why should I care whether or not my bank is strong?

2) Should I be concerned about my employee benefit plan?

3) What are some of the pitfalls of banking on-line?

4) Are bank evaluations important for letters of credit?


WHY SHOULD I CARE WHETHER OR NOT MY BANK IS STRONG?

(After all, all of my deposits are under the FDIC insurance limit!)

We hear this question often from consumers and small business owners who would never dream of bankrolling a shaky auto dealer, real estate agent or mail order house. Surprisingly, it is not asked by government agencies, treasury managers and other financial folks who are well aware of the havoc that can be caused by a fading financial institution.


THE FIRST SIGN OF TROUBLE:
When banks, like most other businesses, get into financial trouble the first steps management often takes to effect recovery are cost cutting and revenue enhancement. At troubled banks, the financial squeeze can translate into poor service -- long teller lines, dysfunctional ATMs, botched transactions and overworked staff.  There is also puzzling hesitancy to make loans to creditworthy borrowers. Moreover, fees and service charges often skyrocket, as the institution tries to earn its way back.


PROBLEMS FOR BORROWERS: Fortunately, fewer banks and thrifts go on to actually fail today. However, among those that do, strict new FDIC policies interpreting deposit account exposure often provide surprise “haircuts” to depositors who mistakenly thought they were below the $250,000 limit. Worse yet are the unlucky borrowers whose loans wind up in the hands of professional asset liquidators looking for any excuse to declare default and accelerate repayment.


BANK SAFETY WATCH:
During the banking and S&L crises of the 1980s, people were reminded of most of these themes with sad regularity. Now that fewer financial institutions are having difficulties, those that are in trouble often can hide in anonymity because of an uninformed public. Fortunately, a large number of excellent educational materials, particularly in the field of personal finance, address the issue of bank safety. Most of these recommend that everyone keep an eye on the banks and thrifts with which they deal. Whether for simple checking and small savings accounts, CDs or for loans, it is so easy and inexpensive for people to know their bank’s financial standing, that it is simply a shame when anyone is caught, sometimes without even knowing it, by an institution’s financial problems. One of the easiest ways to find out the financial condition of your bank, S&L or credit union is to use VERIBANC’s ratings. Instant Ratings are $10 each for a verbal / written confirmation.


SHOULD I BE CONCERNED ABOUT MY EMPLOYEE BENEFIT PLAN?


Be aware that if the financial condition of the bank changes, the amount of your deposit insurance can change.

If you are a member of an employee benefit plan (and definitely if you are an administrator of an employee benefit plan), you have a special reason to be concerned about a bank or savings institution’s financial condition ... By law, if the institution meets the capital levels specified in the FDIC’s deposit insurance rules -- and most do -- each employee’s share in these accounts at any one institution is covered for up to $250,000, even if the total account itself equals much more than that amount. But, if the institution doesn’t have enough capital (as defined by the ... regulator) and it later is closed by the government, those retirement funds will qualify for much less insurance coverage -- up to $250,000 total, not $250,000 for each person in the plan.

Many of VERIBANC’s reports, such as the State Ratings Reports and Watchlist Reports provide each institution’s estimated regulatory capital classification as well as other important financial ratios and measures.

VERIBANC, the firm that pioneered easy to understand bank and thrift financial evaluations for consumers, continues work that began in 1981. In addition to being the most inexpensive source of ratings for individual institutions, VERIBANC is the only firm that discloses precisely the criteria it uses as well as how its ratings have fared in the past. This exacting precision is why insurance companies and other large professional financial managers rely so extensively on VERIBANC’s ratings -- instead of simply taking our word, they can analyze and review the ratings’ effectiveness independently. In fact, one company used our ratings to insure hundreds of millions of dollars of bank deposits in excess of the FDIC’s $250,000 limit. This was known as the DEPOSITSURE® program. It was designed to help protect the deposits the government can’t afford to protect. 

WHAT ARE SOME PITFALLS OF INTERNET BANKING?

Paying bills on-line, for one

"Paying on-line" doesn’t mean payment when the customer pays, but when the paying institution sends the payments. That’s sometimes as much as two weeks later.

And, by the way, what do you know about the bank?

We have had customers, who were considering investing in CDs at an internet bank, contact us to find out the bank’s financial condition. In several cases, they have been surprised to discover they already had other CDs in the same bank, but under its traditional name. If they had bought CDs from the internet branch, it would have put them over the FDIC insurance limit.


ARE BANK EVALUATIONS IMPORTANT FOR LETTERS OF CREDIT?


Be sure your bank has an investment grade or better rating from an acceptable rating company.

Back in 1994 the Office of Management and Budget, in the Office of Federal Procurement Policy Letter 91-4, stated, “It is important to evaluate a bank’s credit worthiness before accepting a letter of credit issued by a bank, because letters of credit are not considered 'deposits' that are covered by federal deposit insurance. . .If a bank is sufficiently unhealthy as to fail, the beneficiary of a letter of credit will generally be regarded as a general creditor. A financial institution must receive an investment grade or better rating from any one of the companies listed in this policy letter (VERIBANC is one of the companies listed.) for it to be considered an acceptable issuer or confirmer of a letter of credit in which the U.S. Government is the beneficiary.” A VERIBANC risk rating of Green, Three Stars is recognized as an investment grade or better rating and is acceptable to the U.S. Government for letters of credit.


Do you need ratings and financial information on your bank quickly?
The VERITREND Report on any U.S. bank of your choice provides ratings, current financial information, three years of historical data and peer group norms, and is available on our web site or as a direct feed from our database to your system, minimizing your data handling / conversion costs.

CAUTION: In short, you need to be aware of the financial health and practices of all of your banking institutions (including banks where third party deposits have been made in your name, banks you use online and any other banks you use, especially those that are located far away) so you can exercise the same common sense and caution you apply in your decisions elsewhere. VERIBANC’s easy-to-understand, red, yellow and green color-coded ratings and star classifications provide an unparalleled and proven means for you to “know your banks.” It’s your money!


BANKING RISKS


Broadly stated, banking risk is the probability that anyone dealing with a financial institution will have problems due to financial weakness or regulatory difficulties at that institution. While the most extreme form of such risk is the possibility that the institution could fail (and, in fact, counting failures is one way VERIBANC measures the effectiveness of its rating system), the impact of banking risk on most people or on their organization is less dramatic.

As with any business, when a bank’s management must focus on survival, on reversing financial declines or responding to regulatory strictures, other areas of operations tend to receive less than their usual emphasis -- or even outright neglect. Extreme cost cutting measures can aggravate problems, particularly for an institution’s customers and vendors. Risk can be heightened if there is no office of the institution nearby. For example, accounting errors can be devilishly difficult to reverse when a personal visit is not feasible.

Companies that are vulnerable to lawsuits stemming from a bank’s problems, like its insurers, can be impacted by issues associated with management’s preoccupation with problems or even with the heavy load of start up or expansion activity. For this reason VERIBANC does not make exceptions in its rating system for the woes (often earnings related) that can accompany a new or rapidly growing bank.

Another dimension of banking risk is what regulatory authorities refer to as “reputation risk.” In its simplest form it is having to answer the question posed by a supervisor or constituent, “Why were you not aware of the problems this institution has been having before the media found out?” Treasurers of large organizations or political entities often bear a particular responsibility to anticipate adverse developments at the financial institutions they use and to minimize concern by their associates that are more removed from the financial oversight function.

VERIBANC’s “whole bank” ratings of institutions serve the broad function of identifying increased banking risk as early as possible after its onset. Our "plain-English" color and star ratings, that summarize each institution’s current condition and future outlook, are based on more rapid response to changes in each institution’s performance than offered by anyone else. Combined with the precision of our track record which we make readily available, this effectiveness makes it simply impossible to find a better tool with which to measure banking risk.

If you have questions you would like to see answered here or if you would like to know more about our company, our reports and our data sets, please:

Call 1-800-837-4226 (1-800-VERIBANc)
Mail to VERIBANC, Inc., PO Box 608, Greenville, Rhode Island 02828

Or, send us an Email.

We look forward to hearing from you

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