You are basically making a loan when you deposit money in a bank account. Good lenders want to be paid back primarily from the borrower’s cash flow. Relying on collateral and insurance are secondary sources of payment.
How can you assess your bank’s financial health? Many bank customers asked this during the Great Recession. I was asked to talk with a few key customers during that time to give them guidance and comfort about our bank’s health. It’s something people don’t think about much until there are headlines about bank failures.
I’ve also created a PDF resource for you that gives additional guidance on the monitoring options I will soon explain. This resource shows two sample regulatory reports and has links to rating agencies.
Before I cover what to monitor, you should first assess how willing you are to monitor your bank. If you aren’t willing to do so, then you should use the services I just discussed to reduce your exposure to a bank failure. Those services may come with fees or reduced interest income. If that loss of income is unacceptable and you have uninsured deposits, you will need to do additional monitoring. Here are some options of things to monitor:
Regulatory Reports
Every bank files a quarterly Call Report with their regulator. These reports contain key financial information about the bank. The regulators provide an analysis of those reports. You can get that analysis at:
| For: | Report Name | URL |
| Banks | Uniform Bank Performance Report (UBPR) | https://cdr.ffiec.gov/public/ManageFacsimiles.aspx |
| Credit Unions | Financial Performance Report (FPR) | https://fpr.ncua.gov/ |
These reports compare a bank’s key ratios over time and against their peer group. You’re looking for ratios that are deteriorating over time or are significantly worse than their peer group. A good page to start on is the summary ratios page. Here are some key items on the summary ratios page to monitor:
- Net income as a percent of average assets: Large losses eat into the bank’s capital. Capital is the first layer of any source of losses before uninsured depositors and other creditors are at risk of loss.
- Net loss as a percent of average total loans and leases: This shows the loan losses a bank has recently experienced.
- Allowance for credit losses on loans and leases to loans and leases: The allowance for credit losses (ACL) is the bank’s best estimate of future loan losses. Losses in excess of their calculations will hit future net income. This ratio states the allowance as a percentage of loans. A low percentage compared to peers puts future income at higher risk. If their other loan ratios are good, their low allowance reflects good loan quality. If their other loan ratios are bad, they may not have enough in their allowance for future losses.
- Noncurrent loans and leases to gross loans and leases: Noncurrent loans are ones 90 days or more past due plus loans that are so impaired that the bank isn’t accruing income on them, even if they aren’t past due. That total is stated as a percentage of all loans. A high percentage means their loan portfolio has quality issues that could lead to future losses.
- Net loans and leases to deposits: A high ratio means the bank has invested a large portion of its deposits into loans. Loans are hard for a bank to liquidate if lots of deposits ask for their money at once. This can cause a bank failure.
- Leverage ratio, Total capital ratio, and Non-current loans and all other real estate owned divided by Tier 1 Capital plus ACL: These are three capital ratios. I won’t bore you with the details of how to calculate these ratios. You can get the calculations from the UPBR instructions on the regulator website. Banks fail when these ratios get very low. These ratios are a better indicator of an impending bank failure than any other ratio I discussed earlier.
Enforcement Actions
Bank regulators publish enforcement decisions and orders they make against banks or employees of banks. These orders may say a bank is not acting in a safe and sound manner, needs to improve its capital position, or has loan quality issues. Here’s a table of where you can search for them.
| Regulator | Who They Regulate | Enforcement Site |
| FDIC | State-chartered banks | https://orders.fdic.gov/s/ |
| OCC | National banks | https://apps.occ.gov/EASearch |
| Federal Reserve | Bank holding companies | https://www.federalreserve.gov/supervisionreg/enforcementactions.htm |
| NCUA | Credit unions | https://ncua.gov/news/enforcement-actions/administrative-orders |
| CFPB | Consumer compliance | https://www.consumerfinance.gov/enforcement/actions/ |
Bank Rating Agencies
The lists of regulatory ratios or enforcement actions may have seemed overwhelming to you. If so, you may want to follow a bank rating agency. Here are some options for you:
- IDC Financial Publishing provides ratings for banks and credit unions. This was the rating system I encountered the most in my banking career.
- Bauer Financial rates all banks and credit unions. You can get their ratings for free.
- Bankrate is a popular site where you can get free ratings. They tend to focus on consumers.
- Weiss Ratings and Veribanc offer bank and credit union ratings.
- Larger banks are covered by credit rating agencies like Moody’s, S&P, and Fitch.
- A.M. Best is known for its insurance company ratings, but it also rates banks.
Investment Reports
You can also monitor debt and equity investment reports for information about banks. These reports are tailored to bond and equity investors but have valuable information about the overall health of the bank. Many small banks aren’t covered by investment analysts.
For more info, check out these topics pages: