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Assigning a rating to a financial institution, following a detailed and comprehensive analysis of that institution, is both a science and an art. It is a science because there are certain mechanical and mathematical formulae (quantitative factors) which can be applied to the financial profile and which point towards a determination of the overall quality of that institution. It is an art for a number of reasons.
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‘Financial insitution’ is a broad term which can be used to include banks, leasing companies, factoring companies, insurance companies, mutual funds, brokerage firms and other firms engaged principally in financial activities. Even the term ‘banks’ can include commercial banks, savings banks, investment banks, Islamic banks and merchant banks. Since banks account for the overwhelming share of such institutions (both in terms of numbers of institutions and in terms of total assets), the topic here will be limited to banks—typically commercial banks, but reference may occasionally be made to other types of banks.
Some of those factors are identified in the sections below and in many cases amount to a series of questions which, when answered, will not provide an immediate answer, but will provide the analyst with the information necessary to come to an informed conclusion.
ISA and IFRS are suggested standards, but the body responsible for formulating them has no legal authority in any particular country. The standards may be adopted completely, partially or not at all by the banking authorities in a given country.
Disclosure referred to here is public disclosure. Regulators, as noted above, usually have even more expansive requirements in respect of disclosure to regulatory authorities.
These actions include re-scheduling loans before they become past due and the recent addition of a category of loans termed ‘past due but not impaired.’ These items could be the subject of an entirely separate discussion.
‘Purchased funds’ which include interbank liabilities or customer repos, are usually short-term in nature.
This could be expressed in terms of beginning total assets, year-end total assets or average total assets (ATA).
- Criteria for Rating Financial Institutions
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