Money: Is your bank credit-worthy?
17 Apr 2018
“Bank depositors’ funds are at risk and we are all responsible for assessing the credit-worthiness of the banks we use,” says the Reserve Bank.
In last fortnight’s article I discussed the Reserve Bank’s Open Bank Resolution policy, where we can be made to take a ‘haircut’ on our deposits if our bank gets into trouble.
Maybe that information was helpful; maybe not. I mean, what can we do as individual bank customers to ensure the bank we are using is safe?
How practical is it for any of us to judge how safe a bank is?
On our own, I agree, it is impossible and that is why all banks must obtain an independent credit rating. They must publicise their rating too. At my bank, the BNZ, there is a pamphlet on a stand in the reception area that describes their credit rating. It is on their website too.
I have summarised the credit ratings of main trading banks most of us use below along with the likelihood of them failing. I have referred to the banks’ Standard & Poor’s credit rating (except where they don’t have one from Standard & Poor’s), as that is the one I am most familiar with, although there are three ratings agencies used by banks in New Zealand: Standard & Poor’s, Moody’s and Fitch.
Credit ratings are not a panacea, they are ‘informed opinion’ only, but the Reserve Bank of New Zealand supports the use of ratings by individual investors as a tool to help make more informed investment decisions.
The top credit rating is AAA, then downwards in order: AA, A, BBB. These ratings are referred to as ‘investment-grade’. Below them, the BB, B, and CCC’s we refer to as ‘speculative-grade’ or ‘junk’. From AA downwards a ‘+’ or ‘–‘ can be added to the rating. Where there is a -ve sign attached to a rating, this is a lower relative standing within that category.
How would you feel using a BBB bank for a 5-year term deposit that had a 1 in 30 chance of failure?
How about using the same bank for a 1-year term deposit? That won’t have the same risk as a 5-year investment, but I would urge caution. You may end up rolling over a 1-year term deposit for several years and although there may be warning signs about the reducing credit-worthiness of your bank, the loyalty you feel for your bank may hinder your decision to withdraw your investment when it matures.
Keep asking great questions …
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