The economy is struggling to regain some strength and nearly every week more names are added to the list of failed banks. Despite the negative drumbeat, Bankrate’s proprietary Safe & Sound ratings system, which shows the relative strength and stability of U.S. banks, thrifts and credit unions, indicates that the majority of institutions remain in the top two categories with ratings of either “superior” or “sound.”
Presented below is an explanation of Bankrate’s Safe & Sound rating system for commercial banks, savings institutions and credit unions:
Details from second quarter data, ending June 2009, show a total of 8,344 institutions with either a four- or five-star ranking versus 7,669 institutions in the one- to three-star categories. That’s an improvement over the first quarter when 8,069 banks, thrifts and credit unions qualified for four or five stars, and 8,044 had a rating of one, two or three stars.
“Even though this is a very difficult environment — loan losses are still rising, unemployment is still rising — the industry is not on its deathbed,” says Greg McBride, senior financial analyst for Bankrate. “We will see more institutions fail and loan losses will continue to be a drag on earnings as well as the overall health of financial institutions for some time. But there are plenty of institutions that have very healthy ratings relative to their competitors.”
Credit unions made the greatest strides with a larger percentage of institutions moving into the four- or five-star rankings in the second quarter from the first quarter. Industry experts caution that the bump up may be due in part to accounting factors as credit unions adjust for losses incurred during the crisis. Nevertheless, the fact that credit unions are nonprofit and owned by their members may be helping them weather the recession a bit better than their banking counterparts.
“Our delinquency rates are about one-third of what you see in the banking sector and our net charge off rates are about half as high because we’re more careful lenders,” says Michael Schenk, economist for Madison, Wis.-based Credit Union National Association, or CUNA.