The financial crisis raises the interesting question of 'how safe is your bank?'
No doubt you have read our post Money tip #99 – How to protect your savings from your bank going bust. This raises the interesting question on ‘how safe is you bank or building society?’
While the FSCS gives you some comfort, investors with large cash holdings may inevitably have to hold more than £50,000 with a particular institution. (the FSCS limit will rise to £85,000 from 1st January 2011). So how do you determine the financial security of a bank?
Well there are realistically 3 ways
1) Look at the interest rate they are offering on their savings accounts. The higher the rate the more desperate they are to get hold of your cash. And desperation is always a weak position to be in
2) Credit default swaps (CDS) – CDS spreads measure the premium a given bank will have to pay in order to borrow money from the market. The higher the figure the greater the market’s deemed risk of the bank defaulting. However, CDS figures are perhaps the most useful measure of a banks perceived risk but are not widely available to the public.
3) So that leaves the rating agencies. Rating agencies such as Stand & Poor’s, Fitch and Moody’s independtaly assess and rate financial institutions credit worthiness. The ratings let other institutions know how safe it is to lend to another institution, normally in the form of bonds. While they are not aimed at providing consumers with information on an institutions stability they do offer a guide. However, ratings agencies have come in for a lot of criticism of late particularly as their ratings are often way behind the pace. For example, Lehman Brothers were still AA rated when they collapsed back in 2008! But unfortunately there is not a lot else out there for the public to use.
Credit ratings are available on-line but you have to go looking for them. However, we’ve complied a table of the latest Fitch’s ratings for reference (click on the image to zoom in). For more information and the latest ratings visit their website www.fitchratings.com/
(in descending order)
AAA: the highest credit rating available
AA : quality companies, a bit higher risk than AAA
A : economic situation can affect finance
BBB : medium class companies, which are satisfactory at the moment
The modifiers '+' or '-' may be appended to a rating to denote relative status within major rating categories.
Non-investment grade (also known as junk bonds)
BB : more prone to changes in the economy
B : financial situation varies noticeably
CCC : currently vulnerable and dependent on favorable economic conditions to meet its commitments
CC : highly vulnerable, very speculative bonds
C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
D : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations
NR : not publicly rated
Short-term credit ratings
Fitch's short-term ratings indicate the potential level of default within a 12-month period.
F1+ : best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment
F1 : best quality grade, indicating strong capacity of obligor to meet its financial commitment
F2 : good quality grade with satisfactory capacity of obligor to meet its financial commitment
F3 : fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments
B : of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions
C : possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favourable business and economic conditions
D : the obligor is in default as it has failed on its financial commitments.