With a total of 92 banks shuttering this year, many are questioning if their banks are next in line for failure. BankRate’s “Safe and Sound” Rating System suggests that it can measure the financial health of banks, but are its ratings accurate?
For starters, how does BankRate.com’s “Safe and Sound” Rating System Work?
According BankRate’s website:
Update: 9/14/2009 Due to a nastygram from Bankrate’s legal department, this text has been removed. You’ll have to click through to their website to read it.
The “Safe and Sound” rating system differentiates banks into five different start ratings, including “Superior”, “Sound”, “Performing”, “Below peer group”, and “Lowest Rating”. Most banks will fall into the 3 to 4 star range.
Out of the three bank failures that occurred on September 11th, all of them (Corus Bank of Chicago, Venture Bank of Washington, and Brickwell Community Bank of Minnesota) had one star ratings according to BankRate.com. Their system did a pretty good job of predicting this week’s failures.
Out of the failures on September 4th, Platinum Community Bank had a 3 star rating. FlagStaff Bank, Vantus Bank, InBank and First Bank of Kansas City all had 1 star ratings.
This hasn’t been the case every week though. Last summer, our friends over at Five Cent Nickel did a similar check of recent bank failures and the banks failures they had researched had much better ratings than this week’s failures. First Heritage Bank, N.A. of Newport Beach, CA was taken over by the FDIC after liquidity problems, but according to BankRate.com, it still had a “3 star” rating.
BankRate admits it’s not the be-all and end-all of whether or not your bank is safe. According to their website, its “Safe and Sound” rating system should be “only one factor in connection with their banking decisions.”
BankRate appears to have a reasonably good job with predicting this year’s bank failures, but a 1 star rating isn’t necessarily a death sentence, and a 3 or 4 star rating doesn’t necessarily mean that your bank if safe either.
