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Director's Corner
San Francisco Region Director's College Computer- Based Training
Capital
Rating Capital Adequacy
The following is an excerpt from the Uniform Financial Institutions Ratings System. Take a couple minutes to read the ratings guide and rate the capital component for First State Bank.
Uniform Financial Institution Ratings System
A financial institution is expected to maintain capital commensurate with the nature and extent of risks to the institution and the ability of management to identify, measure, monitor, and control these risks. The types and quantity of risk inherent in an institution's activities will determine the extent to which it may be necessary to maintain capital at levels above required regulatory minimums. The capital adequacy of an institution is rated based upon, but not limited to, an assessment of the following evaluation factors.
- The level and quality of capital and the overall financial condition of the institution
- The ability of management to address emerging needs for additional capital
- The nature, trend, and volume of problem assets, and the adequacy of allowances for loan and lease losses and other valuation reserves
- Balance sheet composition, including the nature and amount of intangible assets, market risk, concentration risk, and risks associated with nontraditional activities
- Risk exposure represented by off-balance sheet activities
- The quality and strength of earnings, and the reasonableness of dividends
- Prospects and plans for growth, as well as past experience in managing growth
- Access to capital markets and other sources of capital, including support provided by a parent holding company
Ratings
- A rating of "1" indicates a strong capital level relative to the institution's risk profile.
- A rating of "2" indicates a satisfactory capital level relative to the financial institution's risk profile.
- A rating of "3" indicates a less than satisfactory level of capital that does not fully support the institution's risk profile. The rating indicates a need for improvement, even if the institution's capital level exceeds minimum regulatory and statutory requirements.
- A rating of "4" indicates a deficient level of capital. In light of the institution's risk profile, viability of the institution may be threatened. Assistance from shareholders or other external sources of financial support may be required.
- A rating of "5" indicates a critically deficient level of capital such that the institution's viability is threatened. Immediate assistance from shareholders or other external sources of financial support is required.
Consider the ratings definitions above and compare them to the circumstances described in the Report of Examination for First State Bank. What should capital be rated?
- Strong
- Satisfactory
- Less than satisfactory
- Unsatisfactory
- Critically deficient
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