A bank's liquidity, capital levels and asset quality are the factors considered by the Federal Deposit Insurance Corporation to determine if a bank is in trouble. Safety, soundness and compliance with consumer protection laws are the primary focuses when determining a bank's viability.Continue Reading
A bank's performance is determined through an on-site examination to assess its management, financial condition and regulatory compliance using a rating system known as CAMELS. This rating system measures a bank's capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. A bank manages risk by evidencing its ability to collect from borrowers in order to meet the claims of depositors. Written policies and internal controls, such as separation of duties, must be in place, and the bank's lending activity is also reviewed. A sample of loan applications are assessed to ensure that loans are made only to qualified borrowers.
A rating of four or five on the FDIC's five-point scale indicates a bank with financial, management or operational weaknesses that threaten its viability. The number of these banks are considered indicative of the overall strength of the country's financial industry.
The FDIC, Federal Reserve and state banking authorities are jointly responsible for regulating state-chartered banks.Learn more about Banks