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Rating 1
- strong performance
- significantly higher than average performance
Rating 2
- satisfactory
- average or above average performance
- adequately provides for safe and sound operation
Rating 3
- performance flawed to some degree
- considered fair
- neither satisfactory nor average but is characterized by below average quality
Rating 4
- marginal performance
- significantly below average
- weaknesses could evolve to threaten viability of bank
Rating 5
- unsatisfactory
- critically deficient and needs immediate attention
- such performance could threaten the viability of the institution
Text B
Analysis of Capital
In general terms, the function of bank capital is to support the volume, type and character of the bank's business, to provide for the possibilities of losses that may arise, and to enable the bank to continue to fulfill the reasonable credit needs generated within the community that it serves. Inasmuch as it is generally agreed that depositors are not meant to assume risks emanating from the operation of the bank, capital should be sufficient to absorb shrinkage in asset value and other losses that may be incurred.
The risk asset ratio is an objective measure of the amount of shrinkage that can be absorbed by a bank's capital structure and is to be used in rating bank capital. This ratio defines the relationship of gross capital to those assets which contain some potential for loss (i.e. risk assets) without attempting to specify the loss inherent in any given risk asset or risk asset category.
The risk asset ratio is calculated from the bank's most recent Consolidated Report of Condition (including foreign and domestic subsidiaries, when applicable) and is defined as follows:
Risk Asset Ratio = Gross Capital Funds
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| VI. Study the following notes and prepare an oral presentation | | | Analysis of earnings |