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2. Credit Risk Ratings
a. System of Risk Classification
Like most banks, FNBC had during the relevant years a
well-established system of evaluating and classifying credit
risks. FNBC used this system for all transactions including
loans, swaps, and any of its other products. FNBC’s credit
officers established a customer’s risk class rating on the basis
of FNBC’s evaluations of the creditworthiness of the customer and
the industry in which the customer did business. FNBC re-rated
its customers at least annually. FNBC’s credit officers were
independent of the business units responsible for originating
transactions.
FNBC’s credit risk classification system used numbers from 1
to 9. Risk class 1 was the best credit quality and carried with
it minimal risk. Risk class 9 was the worst credit rating and
was considered to be a loss. Risk classes 1 through 3 were
considered investment grade,49 counterparties in risk class 4
were generally considered to be acceptable bank quality assets
which required greater management attention, and counterparties
in risk class 5 were considered undesirable. FNBC did not enter
49 The finance department performed the credit adjustment
calculation on spreadsheets. The CEM amounts and credit ratings
shown on the spreadsheets were derived from information provided
by the credit department. If the risk class rating was not
provided by the credit department, the finance department would
use a risk class 3 rating. The finance department did not always
use the most current risk factors.
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