Dedicated to Deposits: Deals, Data, and Discussion

The Best Bank Ratings Services and Why You Should Care about the Financial Health of Your Bank

If you keep under the standard deposit insurance limit, you should not have to worry about losing your money if your federally insured bank or credit union fails. So why should depositors who keep under this limit care about the financial health of their banks? There are in fact several reasons, and I describe these reasons in this post.

The next question is how to determine the financial condition of your bank? There are a few resources on the web that can help you determine this. I've reviewed some of the best and provided their strengths and weaknesses.

Why You Should Care?

For those who keep under the standard deposit insurance limit (currently $250K until 12/31/2013), it might seem like the financial health of your bank is of no concern. It is true that you don't have to worry about losing any of your principal and accrued interest up to the day of the closure. For most of the recent bank closures, the FDIC has made the transition process very easy for depositors. Often a new bank assumes all deposits, and most everything will stay the same. However, there have been some issues that have caused problems for depositors.

I first described reasons why you should care about the financial health in a previous post, and readers contributed some additional ones. Below is a new list that includes readers' contributions:

  • If a bank fails and the FDIC can't find a buyer, it'll send depositors checks for the insured principal and accrued interest. This takes at least a week. You'll lose at least a week of interest during this time, and there's the worry of it being lost in the mail. One reader who had deposits at Community Bank of Nevada when it failed in 2009 waited several weeks before he received the money. The FDIC had the wrong address, and he had to spend quite a bit of time on the phone with the FDIC for this to be resolved. Another reader reported having a 10-day hold when he deposited the FDIC check at his bank.
  • If you have a checking account at a failed bank and there are no acquirers, and the FDIC does a pay-out of your insured deposit balance, your outstanding checks to vendors will all be returned. Most vendors will assume it's due to NSF, when in reality the checks will be stamped "Bank Closed". Many vendors will then attempt to charge you NSF fees due to their lack of knowledge or experience with this situation.
  • Brokered CDs of a failed bank can take three or more weeks before funds reach your brokerage account. No interest is earned during this period. In addition, it's common for brokered deposits not to be assumed by the acquiring bank so payouts by the FDIC are more likely.
  • When a bank fails, it's common that existing CDs will either be closed or the rate will be lowered (if another bank assumes the deposits). Principal and accrued interest may be safe, but a high interest rate is not safe. Depositors are free to make penalty-free early withdrawals, but they may have trouble finding CDs paying anywhere near the rates that the old CDs were paying. This has been very common in today's low-interest rate environment.
  • FDIC now has rate caps for less than well capitalized banks. This isn't an issue for fixed-rate CDs, but it has been an issue with high-yield reward checking accounts. There have been cases in which banks had to significantly lower their reward checking rates in order to meet the FDIC rate cap for interest checking.

Finding the Financial Health of Your Bank

The most accurate list that shows how close your bank is to failure isn't public. The FDIC maintains a secret "Problem List" of banks. They keep the list secret since disclosure would hurt the banks on the list. Each quarter the FDIC issues its report on the banking industry and provides general information about this list such as the total number of banks on the list and the total combined assets of these banks. In February 23, 2010 the list included 702 banks and $402.8 billion in total assets. The NCUA has a similar process and list for credit unions.

At the same time the FDIC publishes its quarterly reports, it also updates its database with the latest financial data from the banks. This process usually takes just under two months. For example, on February 23, 2010 the FDIC publicly released financial data that was dated December 31, 2009. Once this data is public, several private ratings services process this data and formulate ratings based on their own criteria. This process adds yet another delay with most services taking 1 to 2 months to update their ratings.

This delay is one important issue to consider when reviewing bank ratings. As you can see above, bank ratings may be based on financial data that is up to 7 months old.

Some of the services claim to also update their ratings based on current events. An important event that can give clues about the health of a bank is from enforcement actions issued by government regulators. These can be orders for the bank to correct unsafe and unsound banking practices. Like the financial data, there is some lag time between when an enforcement action is issued and when it's made public. In addition, some enforcement actions are not made public. Sometimes banks will be the first to disclose an enforcement action. This is typically done by banks that are part of a public company. Publicly traded companies are required to report certain material corporate events with the SEC, and these reports are made public.

Deciding which ratings service is the best based on the details of the analysis that they do is difficult. Thus, I did not attempt to make that determination. Each service provides some explanations on their ratings methodology. Feel free to leave a comment if you have opinions on this. The strengths and weaknesses that I list below involve more basic issues.

Financial Strength Ratings Databases

  • Health Scores and Texas Ratios - Update 9/2/10 - Pros: 1) includes credit unions, 2) Fast to update on new FDIC data (days), 3) Free and detailed analysis reports
  • BauerFinanical Star Ratings - Pros: 1) Includes credit unions, 2) Fast to update on new FDIC data (under 1 month) / Cons: 1) analysis reports are not free
  •'s Safe & Sound Star Ratings - Pros: 1) Includes credit unions, 2) Free analysis reports 3) Detailed analysis reports / Cons: 1) Slow to update on new FDIC data (~2 months)
  • Ratings - Pros: 1) Free analysis reports / Cons: 1) No credit unions, 2) Slow to update on new FDIC data (1-2 months), 3) Short analysis reports
  • BankFox HEALTH Report - Pros: 1) Free analysis reports, 2) Detailed analysis reports / Cons: 1) No credit unions, 2) Slow to update (over 1 month)
  • MSNBC BankTracker Troubled Asset Ratio - Pros: 1) Includes credit unions, 2) Fast to update on new FDIC data (under 1 month), 3) Free analysis reports / Cons: 1) Short analysis reports

Useful Unofficial Lists of Problem Banks

If you have other recommendations of ratings services or opinions on the criteria they use, please leave a comment.


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Comment #1 by OC Steve (anonymous) posted on
OC Steve
Excellent article!  Wish more people took the time to think through what will happen when/if their bank fails.  Doing some research on a Bank before becoming a customer is also a good thing to do, especially if the Bank is not located close to you.  Regular readers of this blog know Ken always goes the extra mile to inform, so keep reading daily!

Comment #2 by Ano nymous (anonymous) posted on
Ano   nymous
as always great reading kbg u r awesome

Comment #3 by Anonymous posted on
Advanta closed and I received a check from the FDIC for the balance of my CD.  I deposited the check into my Wachovia account yesterday and it is shown as available today (Sat.).  No hold time at all.

Comment #5 by Anonymous posted on
When I see that a bank is reported to have financial issues or gets a very low rating, I start to move money out from the account.  It is only until the "bad financial status" has passed would I move any money back to the account.  If the bank shuts down, I don't want to have the hassle of waiting for the account to be closed and then get the money.  For the case of CDs, I guess I just ride it out and see if a sale of the bank or a shutdown occurs.

Comment #6 by Allie (anonymous) posted on
Thanks for this column. It has a lot of useful information. Especially like the references.

Is there a calculated risk list for credit unions that we might have access to?

Am forwarding this column to many of my friends.

Comment #7 by Anonymous posted on
If you pay a premium for brokerage CDs, that would be lost in the event of a (pre-maturity) FDIC takeover.

Comment #8 by Anonymous posted on
Actually had a different experience with Advanta,  FDIC check was very prompt, however, bank indicated would put a hold on an FDIC check because of the amount of the check.

Comment #9 by Mary (anonymous) posted on
Since we are talking about risk, Bank Guy would you consider an article about risk to certificate holders from embezzlement at banks and credit unions.  This type of loss is not covered by FDIC or FCUSIF.

Comment #11 by cactus posted on
I don't think that they various rating services include the size of the institution in their ratings.

Really small institutions at at a big disadvantage due to the fixed costs of their infrastructure - their back office, regulatory expense, management, etc.

Credit unions that fail usually have too small and limited a field of membership.

Most of the banks that fail are tiny ones where several wealthy business owners, lawyers, doctors and dentists get together thinking it would be neat to have their own bank.