By Khan Vuong
What You Should Know
As competitive pressures increase, smaller banks are constantly searching for ways to improve operations. One potential source of improvement is a close look at how their credit ratings affect their business operations.
Model-driven credit quality ratings, based on banks’ regulatory financial filings, have been assigned to every bank in the United States.
Insurance providers, deposit brokers, institutional depositors, inter-bank fund dealers, correspondent bankers and other bank analysts and investors use these non-interactive bank ratings as underwriting guidelines or pricing benchmarks. They all touch on one or more aspect of every bank’s operations, financing, funding, contract negotiation, regulatory compliance and, ultimately, bottom-line profits.
Many smaller U.S. banks have not undergone the extensive process of obtaining an interactive credit rating from one of the full-service rating agencies. An interactive rating considers financial performance, longer-term business strategy, and the softer, qualitative information elements of the bank’s risk management and underwriting process. Thus, an interactive rating often provides a more accurate indication of a bank’s financial standing, simply because the financial performance of any business doesn’t always tell the full story of the operation.
But a model-driven credit rating still has a direct impact on the bottom line of the bank, through the potential for lost opportunities and higher costs of doing business. More importantly, as an independent third-party opinion of the financial condition of a bank, a credit rating carries tremendous significance to regulators and market participants.
Khanh Vuong is a member of A.M. Best’s Banking Group. He can be reached at (908) 439-2200, ext. 5633. For more information about model-driven and interactive bank ratings, visit www.ambest.com.