Credit risk
What is criticized and classified assets?
Criticized and classified assets are loans rated special mention, substandard, doubtful or loss under the US regulatory credit classification framework.
US bank regulators use a common set of categories to describe weaker credits. Pass loans are those not adversely rated. Special mention loans have potential weaknesses that deserve management's close attention and could weaken the credit if left uncorrected. Substandard loans are inadequately protected by the borrower's current sound worth and paying capacity or by collateral, and have well-defined weaknesses with a distinct possibility of loss if not corrected.
Doubtful loans have all the weaknesses of substandard loans, and collection or liquidation in full is highly questionable and improbable. Loss assets are considered uncollectible and of such little value that carrying them as bankable assets is not warranted. Criticized assets include special mention and all classified loans. Classified assets are those rated substandard, doubtful or loss.
Classification levels are closely watched by examiners, management and investors, often expressed as classified assets relative to Tier 1 capital plus the allowance. A common pitfall is delaying downgrades until a payment default, even though classification should reflect the credit's condition, not just its payment status. Internal rating scales should map clearly to these regulatory categories.
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