If you would like to read more detail on our process for evaluating a bank, feel free to read it here: As a result, an ideal bank gets 100 points, an average one 60 points, and a bad one 20 points. To make our analysis objective and straightforward, all the scores are equally weighted. If a bank looks much worse than the peer group in the sub-category, it receives a score of 1.Īfterwards, we add up all the scores to get our total rating score. If a bank looks worse than the peer group in the sub-category, it receives a score of 2. If a bank looks in-line with the peer group in the sub-category, it receives a score of 3. If a bank looks better than the peer group in the sub-category, it receives a score of 4. If a bank looks much better than the peer group in the sub-category, it receives a score of 5. Each of these four categories is divided into five subcategories, and then a score ranging from 1-5 is assigned for each of these 20 sub-categories: These are: 1) Balance Sheet Strength 2) Margins and Cost Efficiency 3) Asset Quality 4) Capital and Profitability. We focus on four main categories which are crucial to any bank’s operating performance. Over the coming months, we intend to publish articles outlining our views on this matter.įirst, we want to explain the process with which we review the stability of a bank. While we outlined in our last articles the potential pitfalls we foresee with regard to various banks in the foreseeable future, we have not provided you with a deeper understanding as to why we see the larger banks as having questionable stability. So, at the end of the day, it behooves you, as a depositor, to seek out the strongest banks you can find, and to avoid banks which have questionable stability. And, finally, we explained that the next time there is a financial meltdown, your deposits may be turned into equity to assist the bank in reorganizing. Moreover, we also outlined why reliance on the FDIC may not be wholly advisable.
This places you in a precarious position should the bank encounter financial or liquidity issues. We explained the relationship that you, as a depositor, have with your bank is in line with a debtor/creditor relationship. Over the last few months, we have written several articles outlining our views of banks in general.
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