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Supervisory Evaluation and Rating

Supervisory Ratings and Definitions

Component and composite ratings are assigned using a 1-to-5 numerical scaleㅡ1 (Strong), 2 (Satisfactory), 3 (Less than satisfactory), 4 (Deficient), and 5 (Critically deficient). The meaning of the ratings for banks, nonbank financial companies, financial investment services providers, insurance companies, and financial holding companies is similarly defined.

Rating Methods and Processes

Component rating is determined on the basis of the evaluation of quantitative and non-quantitative evaluation factors. For each component, the quantitative and non-quantitative evaluation factors are aggregated using simple average. The component ratings are then aggregated using varying weights to determine a preliminary composite rating (5 possible ratings, 15 possible levels). The final composite rating is then assigned following a full evaluation of the institution's overall business conditions and capability, supervision issues and concerns, assessment of results from off-site monitoring and ongoing supervision, market conditions, and other relevant factors not fully captured in the preliminary composite rating (5 possible ratings, 15 possible levels).

Frequency of Rating Assignment

As a general rule, supervisory evaluation and rating takes place when the FSS conducts a full-scope examination of the main office of a financial firm. In addition, the FSS conducts CAEL evaluationㅡcapital adequacy, asset quality, earnings, and liquidityㅡof financial firms each quarter on the basis of the business report that financial firms are required to file with the FSS.

Adjustment to Composite Rating

The composite rating assigned to a financial institution may be adjusted following the quarterly CAEL composite rating in accordance with the criteria established in the supervisory regulations. Under the rules, rating adjustment may be made when:

  • (a) The quarterly CAEL composite rating of quantitative factors drops by more than two or more ratings from the institution's most recent composite rating;
  • (b) The quarterly CAEL composite rating of quantitative factors deteriorates for two consecutive quarters from the institution's most recent composite rating;
  • (c) An institution is assigned a composite rating of 1, 2, or 3, but the capital adequacy or the asset quality component of the quarterly CAEL composite rating is assigned a rating of 4 or 5; or
  • (d) The FSS makes the judgment that rating adjustment is necessary because of the institution's worsening business conditions, heightened risk of asset deterioration, or other difficulties.