Carries out MEPS credit checks

Creditworthiness of banks: how they are checked and checked

Just like companies or private individuals, banks - like every debtor - are subject to a so-called credit check.

What this is all about is particularly interesting for private investors, because when choosing an investment they can orientate themselves on the creditworthiness of a company.

A credit check means that a debtor is checked for their creditworthiness - i.e. their economic ability to repay as well as their actual willingness to pay.

A good credit rating therefore suggests solid finances.

more on the subject: What is creditworthiness? A definition

The credit check of a bank is similar to that of companies or private individuals. The result provides information about the condition of the bank and can be decisive for whether investors trust the bank - or not.

Credit checks by the banks

The banks determine the creditworthiness of a debtor (i.e. a company or a private person) as part of the lending process. Because only those who can show a good credit rating will receive a loan.

For this purpose, the query is made with the protection association for general loan protection or Schufa Holding AG (Schufa query).

For example, the bank learns of further credit obligations, issued credit cards or the submission of an affidavit. No entries mean good credit.

more on the subject: Sense and purpose of the Schufa information

The Schufa also uses its own scoring process (or evaluation process). The customer data is divided into scores. The lower the score, the worse the customer's creditworthiness.

In addition to account management information, scoring also includes personal data such as place of residence and occupation. The credit default risk is then assessed accordingly.

In this respect, civil servants are also more preferable debtors because they cannot be terminated, as the risk of losing one's job and possibly no longer being able to pay has a negative impact on creditworthiness.

Credit check of self-employed and companies

In addition to the Schufa, data can also be obtained from Creditreform, for example from the self-employed.

more on the subject: Determine creditworthiness via Creditreform - an early warning indicator

When checking the creditworthiness of companies, general information from a credit report (e.g. Creditreform), the equity ratio and the cash flow calculation are used.

In addition, information on the financial situation and further planning of the company are used.

However, each bank can determine the weighting of the respective criteria individually.

Rating agencies: rating on a grand scale

Just like the companies and private individuals who check them, banks are also debtors and are also subject to credit checks.

This is done by the rating agencies who, in addition to the banks, also assess the creditworthiness of states and their local authorities (e.g. the federal states).

The most renowned, albeit most feared, rating agencies are Standard & Poor’s (S&P), Moody’s and Fitch Ratings.

more on the subject: Rating agencies: Graders with a tendency to make mistakes

Standard & Poor’s (S&P) and Fitch Ratings use a scale with letter codes for evaluation. The top grade is AAA ("Triple A"), the worst grade is D - in this case the debtor has defaulted on payment.

In between, it is rated with AA, A, BBB, BB, B, CCC, CC and C as well as the allocation of plus and minus signs. The speculative area, also called "junk area" (from English "junk"), begins with a rating of BB.

Moody's uses a similar scale and rates debtors with rating codes of Aaa, Aa, A and Baa as investment-worthy. The codes Ba, B, Caa, Ca, C and NR (no evaluation), on the other hand, mark out the “junk area”.

Instead of plus and minus, Moody’s specifies its ratings using the numbers 1 - 3 (upper, middle and lower third of the rating range).

Conclusion: credit check provides information about finances

A credit check is necessary for private individuals and companies as well as for banks.

On a small scale, this regulates lending and, on a larger scale, assesses the lender's solvency.

Investors are particularly interested in checking the creditworthiness of companies in which they want to invest.

Because with a good credit rating you can usually assume a solidly operating company that is accordingly profitable.

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