Banks and credit unions are rated according to the soundness and overall safety of their internal practices via a formula instituted by the Federal Deposit Insurance Corporation (FDIC). This system rates banks on a scale of 1 to 5 and ratings of 1 and 2 indicate a bank that is financially sound and properly managed.

Should a bank be rated in the 4 and 5 range, the FDIC formula indicates that particular bank is suffering worrying problems. In fact, a bank rated “5” is an indication that such banks suffer from an unusually high probability of “failing within the next 12 months”

The FDIC breaks down and assesses the financial soundness of banks using a seven-part ratings system which includes tests of:

  •  Compliance Examination Composite Ratings,
  • Community Reinvestment Action (CRA) Examination Composite Ratings,
  • Government and Municipal Securities Dealer (GSD and MSD) Examination Composite Ratings,
  • Government and Municipal Securities Dealer (GSD and MSD) Examination Composite Ratings,
  • Registered Transfer Agent (RTA) Examination Composite Ratings,
  •  Safety and Soundness/Risk Management Examination Composite Ratings,
  • Trust Examination Composite Ratings.

You can find the specific details of how such tests of a bank’s soundness and compliance are determined here on the FDIC website.

In practice the higher-numbered ratings indicate that a bank’s fiduciary activities are “extremely unsafe and unsound” and that the administration of these banks are “critically deficient” in a number of major aspects.

These troubled banks suffer from poor administration and demonstrate flagrant disregard for laws and regulations. They may display willful practices which diverge from sound fiduciary principles and practices.

The FDIC considers banks with these sorts of issues and severity of problems “beyond management’s ability or willingness to control or correct,” and that determination is an enormous red flag when it comes to the level of trust you can expect from a bank.

In a worst-case situation, these banks will come under constant close supervisory attention and continued violations may result in termination of all a bank or credit union’s fiduciary activities.

Annamarie Aveytia

By Annamarie Aveytia

Annamarie is our creative director and her experience includes more than 14 years experience in visual design and a background in B2B and B2C communications. A creative thinker able to manage multiple projects simultaneously, she collaborates closely with members of our marketing and creative teams to fully understand the scope of our project to develop campaign strategies. Placing data, storytelling and innovation at the wheel of driving brand strategy, she thrives on creating culturally impactful and meaningful user experiences. Annamarie earned her BFA in Graphic Design from Maryville University in St. Louis, MO, and she spends her free moments pursuing interests in automotive illustration, auto racing, equestrian sports, photography, film-making and piloting drones.

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