As financial institutions deal with the
current struggles of the market, there
has been much discussion in the media about the capital position of various
banks and lenders. The information is ever-changing and can be confusing to business
customers.
The truth is, business customers should not
instantaneously get nervous if their bank has
a weakened capital point, according to Jim
Geuther, manager of commercial banking for
FirstMerit Bank, Cleveland. The responsibility rests with each client to determine if their
banking relationship has been impacted by a
change in their bank’s financial condition.
And, if the impact is meaningful enough, to
look for a new financial institution.
Smart Business spoke with Geuther about
how capital position affects a bank, how
those changes affect business customers and
the warning signs for which a business customer should look.
What does it mean for a business customer if
a bank has a weak capital position?
For starters, a weakened capital position
should not be interpreted as the first step
toward closing the bank’s doors. Rather, it
does mean the institution must carefully
protect its equity from further deterioration,
as its capital cushion has been compromised. This situation does make an institution more vulnerable to change and may
increase the likelihood of it being acquired.
To assess the capital position of a specific
bank, one can review the bank’s financial
statements, speak to an industry expert or
financial adviser, or simply ask his or her
banker for insights.
Are there warning signs of a weak capital
position for which business customers
should look?
In order to protect their equity position
from further erosion, banks with weakened
capital positions are likely to behave differently with their customers. Business owners
will typically experience this inconsistency
at the time of their annual financial review.
This process should ordinarily follow a consistent, predictable pattern of reviewing
financial statements in order to assess current and potential credit risk. Instead of asking the usual questions, banks in a protective mode will undoubtedly probe further
than they have previously. This is clearly a
warning sign to business owners. It is similar to a client who goes to see his or her
physician for an annual exam. If he or she
sees the doctor and, instead of asking the
routine questions expected during an annual examine, the doctor begins to order up an
EKG, chest X-Ray and start to order surgery,
it is a signal that there is something wrong.
At this time, it is important to get a second
opinion because there may be a deeper reason for the change in disposition. A business
customer should look for a bank that shows
consistency in its credit process.
What does ‘tightening credit standards’
mean to the business customer?
According to a survey conducted by the
Federal Reserve this year, up to one-third of
all U.S. banks had tightened their credit
standards. ‘Tightening credit standards’ simply means that banks are likely to operate
more conservatively. For business customers, it means banks are going to ask
more questions when taking credit applications. They want a deeper understanding of the company’s business before they lend
money. As far as the banking industry is concerned, banks all operate similarly; the
money is the same, the products are similar,
and they all tend to operate within a box.
Depending on the status of the market,
there will be times where banks are more
aggressive and willing to do business on the
edge of the box. That is what we saw during
the recent subprime period. Banks were
operating on the far edges or outside the
box. Now, they are feeling the backlash of
operating so aggressively and are currently
tightening up lending standards, becoming
more conservative. Banks still have money
to lend, they are just being more careful and
staying toward the middle of the box while
they are lending.
Should business customers look for a new
bank if their bank is being merged with
another bank?
Again, the first instinct should not be to
run. Often the bank that is taking over will
do numerous things for the business customer to keep his or her business. It is simply time to evaluate if all the needs of your
business are being met.
Not all mergers mean bad news for business customers. In some cases, a merger
simply means a new name on the sign. In
other instances, it may mean good news for
business customers. It may introduce
clients to new products or capabilities they
did not have at the previous bank. As with
any change, there may be aspects that business customers do not enjoy or benefit
from. A merger may cause pricing to
change, costing the business customer
money. If customers feel their needs are
being met and has a good relationship with
their banker, there may be no reason to
change.
However, regardless of the capital position
or bank name, I encourage business owners
to assess the overall service and value they
are receiving from their bank to ensure it is
an equal exchange. Just like with a regular
physical, there is nothing wrong with getting
a second opinion about the health of your
banking relationship.
JIM GEUTHER is a manager of commercial banking for FirstMerit Bank. Reach him at (216) 694-5683 or [email protected].