What does a bank’s credit rating mean? Banks Credit rating, to begin with is basically the assessment of the credit merit of a debtor. This is can happen mainly to a business, company or the government.
How is it calculated?
A banks credit rating is the same as a credit score and it is a numerical value. This can also be defined as the grading systems that are usually used by banks and other lending institutions when one applies for a credit card, bank account, mortgage, overdraft and other financial needs and products. Banks credit rating can also be a forward-looking opinion about risks involved in credit. A bank credit rating is an autonomous opinion on the ability and willingness of a financial institution to repay its owed debts.
The rating provides a simplified summary measure of risks that are moderately easy to understand. The presence of a rating makes it easy for depositors and creditors to monitor the riskiness of an individual financial institution and make proper investment decisions. The institutions are usually rated by rating agencies that use letter grades or other ranking means to indicate creditworthiness. However, ratings are relative or not absolute, and none is even guaranteed.
Who Rates the Banks?
A bank’s credit rating, credit assessment and evaluation for companies and even government are done by credit rating agencies such as Fitch, Moody’s and Standard & Poor’s. The Banks credit ratings agencies are usually paid by the financial institutions that seek credit rating for itself.
Bank Credit Ratings can be grouped into two wider categories that are investment grade and non-investment grade. If we are to use an example, a corporate bond that is rated ‘AA’ is viewed by a rating agency as having a higher credit quality than that which cooperate bond has ’BBB’ rating. However, having the ‘AA’ rating is not a guarantee that a particular cooperate will not default, just that in the opinion of the agency, it is less likely to default than the ‘BBB’ grade.
What Types of Rating are there?
In the investment and non-investment categories in Banks credit rating, a bank that gets a non-investment grade rating is more likely to be really troubled or branded ‘junk’. Also, a credit rating can be given to any party that seeks to borrow money. A bank credit rating does not only determine whether the party borrowing money will be approved or not; but also the interest rates that will accrue on the loan. The ratings also help potential purchasers of bond determine whether or not to buy bonds.
It is, therefore, imperative for many financial institutions to realize what does banks credit mean? And remain assiduous in maintaining a high credit rating.