July 16, 2018 – Banking is an area many individuals believe they have a strong grasp of. Yet, when it comes down to making strong financial decisions, they do not know as much about banking as they believe. Banking expert and business consultant Robin Trehan recently explained key points individuals shouldn’t overlook while understanding the banking sector.
Trehan states individuals will not only know more about banking but will be able to achieve financial safety by understanding these key points.
“There are multitudes of issues to work on while analyzing a bank,” Trehan said. “They can be broken down to asset quality, liquidity, earnings, capital, sensitivity to market risk, management. The concept of CAMELS is a fundamental which cannot be skipped.”
CAMELS is an idea that was developed in the United States and rates a bank’s overall condition. Every bank and credit union in the U.S. receives a CAMELS rating. The system rates a bank from 1 (strongest) to 5 (weakest).
The rating system isn’t the only key point individuals shouldn’t overlook while understanding banking, according to Trehan. The financial expert implores his clients to look into banking ratios as well.
“Banking ratios significantly determine the financial position of your bank,” Trehan explained. “Mainly, you need to know capital and liquidity ratios. Capital ratios measure your equity capital to total assets. Liquidity ratios, on the other hand, determine your bank’s capability to meet the needs of borrowers, such as credit and deposit withdrawals.”
Tier 1 Capital and Tier 2 Capital are two other important banking concepts unknown to many people. These terms look at the financial strength of a bank and show whether a bank can provide the service it advertises.
“Tier 1 Capital examines the bank’s financial strength through the view of a regulator,” Trehan said. “Core capital consists of Tier 1, which helps determine if your bank can effectively keep up with consumer needs. Tier 1 Capital is the core capital and consists of shareholder equity.”
Trehan stresses Tier 2 Capital looks into further ways a bank is stable. While it may meet Tier 1 criteria, Tier 2 should still be met to show a bank’s strength.
“Tier 2 Capital also measures your bank’s financial strength; it is also known as supplemental capital,” Trehan said. “It consists of undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. Lots of time you will also see goodwill on the books recorded for Tier 2 Capital.”
By knowing more about financial terms, individuals will understand banking far more.
About Robin Trehan:
Robin Trehan is a Partner at Credit Capital Funding in Chicago, Illinois. Trehan has worked for Credit Capital Funding since 2002. Trehan is an expert on a diverse set of banking topics including blockchain, e-payments, crypto banking, and commercial banking. Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business.