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Supervisory Evaluation and Rating

Use of Supervisory Ratings

Prompt Corrective Action

The supervisory rating the FSS assigns to an institution becomes the basis for prompt corrective action (PCA), which may vary from management improvement recommendation (MIR) and management improvement demand (MID) to management improvement order (MIO). For a bank, MIR may be issued when (1) the composite rating is 3 or better, and (2) the rating for capital adequacy or asset quality is 4 or 5. For an insurance company, MIR may be issued when (1) the composite rating is 3 or better, and (2) either the rating for the capital adequacy component or the ratings for two of the insurance risk, interest rate risk, and investment risk components are 4 or worse. For securities companies, MIR may be made when the rating for the capital adequacy component is 4 or worse. MID is issued when a bank, a securities company, or an insurance company is assigned a composite rating of 4 or worse, while MIO is limited to a failing financial institution.

Investment in Subsidiary

The use of supervisory rating extends to a financial firm's acquisition of a subsidiary or investment in it. Where a bank seeks to increase investment in a subsidiary, the bank's most recent composite rating must be either 1 or 2, and the subsidiary's most recent composite rating must be 1, 2, or 3. Where a financial holding company seeks to acquire a new subsidiary, the ratings for the parent and the existing subsidiaries must be 1 or 2, and the rating for the subsidiary to be newly acquired 1, 2, or 3.

Examination Cycle

Supervisory rating is one of the factors that the FSS uses when determining the examination cycle for a financial institution. For an institution with a composite rating of 2 (satisfactory), the full-scope examination is planned at a 2 to 3 year cycle with minimum supervision for components with the highest ratings.

Nondisclosure of Supervisory Ratings

The FSC/FSS subscribes to the confidentiality of financial institutions' supervisory rating and other nonpublic supervisory information.

Bank Component and Composite Ratings
Bank Component and Composite Ratings
Ratings 1.Strong 2.Satisfactory 3.Less than satisfactory 4.Deficient 5.Critically deficient
Capital adequacy
  • Capital level strong relative to risks, well above industry average;
  • Capital level satisfactory relative to risks, worse than strong;
  • Capital level insufficient relative to risks or asset risks, below industry average;
  • Capital level deficient relative to risks;
  • Capital support from external sources needed;
  • Capital level critically deficient relative to risks;
  • Viability uncertain;
  • Immediate capital support from external sources needed;
Asset quality
  • Strong asset quality and credit practices;
  • Minimal risk;
  • Minimal supervisory concern;
  • Satisfactory asset quality and credit practices;
  • Modest level of supervisory attention needed;
  • Less-than-satisfactory asset quality;
  • Trends indicative of asset quality deterioration or risk exposures;
  • Improvement needed in credit practice and risk management;
  • Higher level of supervisory concern than before;
  • Deficient asset quality;
  • Levels of risk and deteriorating assets significant and poorly controlled;
  • Institution’s viability uncertain if left unchecked;
  • Critically deficient asset quality;
  • Institution’s viability questionable;
Management
  • Strong performance by management and board of directors;
  • Management and the board amply capable of addressing existing and potential risks and problems;
  • Satisfactory performance by management and the board of directors;
  • Management and the board effectively addressing weaknesses and risks;
  • Less-than-satisfactory performance by management and the board of directors;
  • Improvement needed in risk management practices;
  • Insufficient response to the institution’s problems, risks, and conditions;
  • Deficient management and board performance;
  • Inadequate risk management;
  • Strengthening or replacing management or the board may be necessary;
  • Critically deficient management and board performance; strengthening or replacing management or the board is necessary;
Earnings
  • Strong earnings;
  • Earnings more than sufficient to support banking operations and maintain high capital and allowance levels;
  • Satisfactory earnings;
  • Earnings above industry average and sufficient to support banking operations and maintain high capital and allowance levels;
  • Recent earnings experiencing slight decline;
  • Less-than-satisfactory earnings;
  • Earnings fluctuating and unsustainable, insufficient to fully support banking operations and maintain high capital and allowance levels;
  • Deficient earnings;
  • Earnings erratic, fluctuating, experiencing substantive drops, and insufficient to support banking operations and maintain high capital and allowance levels;
  • Critically deficient earnings;
  • Losses and capital erosion a serious threat to the institution’s viability;
Liquidity
  • Strong liquidity levels and fund management practices;
  • Reliable access to fund sources to meet present and anticipated liquidity needs;
  • Satisfactory liquidity levels and fund management practices;
  • Slight decline in liquidity, increased reliance on external funds; Modest weaknesses in fund management practices;
  • Liquidity levels or fund management practices in need of improvement;
  • Insufficient liquid assets or increased reliance on interest rate-sensitive funds;
  • Unable to secure funds at competitive terms;
  • Evidence of material weaknesses in fund management practices;
  • Deficient liquidity levels or inadequate fund management practices;
  • Unable to secure ample funds at competitive terms;
  • Critically deficient liquidity levels and fund management practices;
  • Immediate external support needed to meet maturing obligations or other liquidity needs;
  • Viability of the institution threatened;
Risk management
  • Strong risk management;
  • Minimal risk levels;
  • Effective risk management systems for identifying, measuring, monitoring, and controlling risk;
  • Satisfactory risk management;
  • Risk levels under control;
  • Some weaknesses in risk management but well controlled by management;
  • Material risk levels likely to adversely affect capital and earnings;
  • Deficiencies in risk management;
  • Material risk levels threatening earnings and capital;
  • Significant default risk;
  • Risk management system too deficient to effectively identify, measure, monitor, and control risk;
  • Significant risk levels threatening the institution’s viability;
  • Wholly inadequate risk management practices;
Composite rating
  • Institution sound in nearly all aspects;
  • No matters of supervisory concern;
  • Minor weaknesses but can be addressed in an ordinary, routine manner;
  • Not susceptible to vagaries of business conditions or financial markets;
  • Strong management performance and risk management;
  • Institution fundamentally sound;
  • Moderate weaknesses present, but well within the capabilities of the management or minimal supervisory action;
  • Institution generally stable and capable of withstanding business fluctuations;
  • Broadly satisfactory risk management;
  • Institution exhibiting a degree of supervisory concern in financial conditions, management performance, and compliance;
  • Institution in need of more than routine supervisory concern;
  • Institution less capable of withstanding business fluctuations and more vulnerable to external developments and conditions than institutions with composite rating of 1 or 2;
  • Failure unlikely in consideration of the institution’s overall business and financial conditions;
  • Institution exhibiting generally deteriorating financial conditions; Wide-ranging and serious financial and management deficiencies requiring close supervisory attention;
  • Institution not likely to withstand business fluctuations;
  • Failure a distinct possibility;
  • Unacceptable risk management practices;
  • Institution exhibiting alarmingly deteriorating financial conditions, and failure highly probable;
  • Significant risk to deposits;
  • Immediate external support required to remain viable;
  • Greatest supervisory concern in need of immediate supervisory action;
  • Severity of risks and other problems beyond the ability or willingness of the management to address or control;