What Is a Bank Credit Rating?

Definition & Examples of Bank Credit Ratings

Bank teller speaking with a customer
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Bank credit ratings are estimates of how likely a bank is to default or go out of business. These grades are gives by agencies such as Moody's Investors Services. Consumers should avoid banks with "junk" ratings.

Learn more about how bank credit ratings work and what they can impact.

What Is a Bank Credit Rating?

As a consumer, your personal credit rating can affect the interest rate you get on loans, whether or not you get a job, and if you can qualify to purchase a home. Similarly, banks have credit ratings based on an estimate of how likely the bank is to default on its debts and go out of business.

Bank credit ratings provide:

  • A common vocabulary for consumers, investors, government agencies, and financial institutions to use
  • Third-party insight into the reliability and risk level of financial institutions

Agencies such as Fitch Ratings, Moody’s Investors Service, and Standard & Poor's issue credit ratings for banks (along with other financial institutions and investments). These ratings are normally given as letter grades, with an AA or AAA rating being better than a BB or BBB rating, and so on.

An AAA or AA rating doesn’t guarantee a bank won’t default, it just means that these agencies don't consider a default likely.

There is another rating called a non-investment grade rating—also known as a "junk" rating—which goes to banks that are troubled.

How a Bank Credit Rating Works

The three global credit ratings companies (Moody's, Fitch Ratings, and S&P Global Ratings) grade banks and other financial institutions according to their quality, reliability, and their risk of default on obligations. The scales they use are slightly different but generally equivalent.

Ratings by Agency
Moody's Fitch S&P Meaning
Aaa AAA AAA Highest quality, lowest risk
Aa AA AA High quality, low risk
A A A Upper-medium quality, low risk
Baa BBB BBB Medium quality, moderate risk
Ba BB BB Speculative quality, substantial risk
B B B Speculative quality, high risk
Caa CCC CCC Poor quality, very high risk
Ca CC CC In or near default, possibility of recovery
  C C In default, low chance of recovery, may still be paying obligations
C D D Has defaulted on obligations, will likely continue to do so

Fitch Ratings also includes an "RD" designation, meaning restricted default, between C and D. This indicates that the institution has defaulted on some financial obligations, but has not entered bankruptcy or ceased operating.

These ratings may be given modifiers to show higher degrees of nuance between them. Moody's ratings may add 1, 2, or 3 to the letter rating. Standard & Poor may add + or -. For example, an AA+ is equal to an Aa1 and is at the top end of the AA or Aa category. An AA- is equal to an Aa3 and is at the lower end of the AA or Aa category. 

Credit ratings are not given once; they are reevaluated and reassigned, sometimes at very different levels, depending on the current financial situation and level of risk for the financial institution.

Credit ratings can impact customers differently depending on what type of business they do with the bank. For example, if a bank’s creditworthiness goes into junk territory or even slumps for a while, it’s possible that people who hold large open-ended loans could be affected. These include business lines of credit and home equity loans.

This is because when a bank is troubled, it needs to improve its liquidity by preserving capital and therefore may have to pull in its credit lines, so you may lose borrowing power. Sometimes troubled banks also will begin to close branches and lay off employees.

This won’t affect the safety of your deposits, but it can result in problems in your relationship with your bank if they close your local branch.

Banks with high-level ratings, however, aren't only trusted more by customers. They are trusted more by government agencies local businesses, and international corporations.

Bank credit ratings don’t reflect the likelihood of bank fraud. Your bank could still be vulnerable to a security breach, even if it has a strong credit rating, depending on the security measures it has in place for accounts and customer information.

How Much Should Consumers Worry About Bank Credit Ratings?

Bank credit ratings are one tool that consumers and investors can use to judge financial institutions, but they are not absolute measures of a financial institution's reliability.

Unpredictable economic changes, or poor business practices, can cause even a highly-rated bank to go into default. And a lower rating does not guarantee that a bank will experience financial distress.

The one bank rating consumers should always pay attention to is a junk rating. Usually, this means a bank is in a great deal of distress, and you will likely be safer working with another financial institution.

Otherwise, if your bank is insured by the FDIC, you probably don’t have to worry about its credit rating. The FDIC, or Federal Deposit Insurance Corporation, insures every bank deposit account up to $250,000 per depositor, per account.

There is similar insurance for accounts at credit unions called the NCUSIF, or National Credit Union Share Insurance Fund. If you have more than $250,000 on deposit the easiest way to protect yourself is by splitting the money among different institutions to come under the $250,000 threshold.

As long as your money is FDIC insured, then if your bank goes under you will be protected. Most consumer have accounts that are 100% guaranteed by FDIC insurance and therefore don’t need to worry about bank credit ratings much, if at all.

Key Takeaways

  • Bank credit ratings are estimates of how likely a bank is to default or go out of business.
  • These grades are gives by Moody's Investors Services, Fitch Ratings, and S&P Global Ratings, three third-party agencies.
  • As long as your accounts are FDIC insured, you are likely not at risk even if your bank has a lower credit raring.
  • However, consumers should avoid banks with "junk" ratings.

Article Sources

  1. S&P Global Ratings. "Understanding Credit Ratings." Accessed Aug. 26, 2020.

  2. Fitch Ratings. "Rating Definitions." Accessed Aug. 26, 2020.

  3. S&P Global Ratings. "Guide to Credit Rating Essentials," Page 13. Accessed Aug. 26, 2020.

  4. Moody's. "Rating Symbols and Definitions." Accessed Aug. 26, 2020.

  5. S&P Global Ratings. "Guide to Credit Rating Essentials," Page 5. Accessed Aug. 26, 2020.