The rapid change and constant
unease of the economic market
today has many consumers and business customers more aware than
ever about their bank’s capital position.
It is a hot topic in the media today and
interest and awareness have heightened
in recent months as banks continue to
make headlines.
While customers may be more aware
of a bank’s capital position, it is important to use the information appropriately
when making financial business decisions. The media has discussed “capital”
at length, but only very broadly.
Consumers should be educated on what
capital really is, why it is being impaired
so dramatically and at what levels they
should be concerned.
“Capital is certainly one indicator of a
financial institution’s strength,” says
David Janus III, president and CEO of
FirstMerit’s Cleveland region. “The stock
market’s reaction over capital concerns
at some financial institutions confirmed
that belief. However, there are many
more factors consumers must consider
when evaluating a bank’s financial
strength.”
Smart Business spoke with Janus
about the effects a bank’s capital position may have on your relationship with
your bank and what you must consider
when evaluating capital position.
How can a bank’s capital position affect the
relationships consumers and business customers have with their bank?
A bank under capital stress may
change the way it deals with its customers. Capital is the cushion that protects the depositors and shareholders
against loss. With each loan a portion of
the bank’s capital is ‘committed’ to back
that loan. Capital has a real economic
cost and raising additional capital
increases costs to the bank. A bank
under stress may have to reexamine its
loan portfolio and elect to reduce loan
exposure to free up capital.
Does the unknown in today’s market create
stress for consumers that they in turn take
out on their banks?
A good relationship with your bank is
important whether you’re a depositor, a
borrower or both. People need to be
comfortable with the financial stability
of their institution. A good bank communicates clearly with customers and
addresses their questions and concerns.
What real effect does a bank’s capital position have on the service a consumer
receives?
Asset write-downs and losses impair
capital. Earnings are also impacted by
write-downs and losses. Shareholders
expect earnings; therefore management
often makes expense cuts to improve
earnings. Significant staff reductions can
affect customer service. Weakening capital positions are also affecting consumers’ banking behaviors. In recent
years, consumers often waited out any
troubled times their financial institutions experienced. Today, consumers are
not so patient. As we see in the market
now, some customers change banks
because of their concerns. Few are waiting until they are impacted.
Is a bank’s capital position ever a warning
sign that the bank is in real trouble?
Absolutely. Very large charges against
capital or a continuing trend of declining
capital for several quarters are red flags.
A clear warning sign is when a bank’s
capital levels are approaching regulatory
minimum levels. However, if your bank’s
capital position has been negatively
impacted just recently or for a brief period, do not panic. Ask questions of your
banker, understand what is going on
with the bank. Understand your FDIC
insurance coverage, evaluate your relationship with the bank and your banker
and then decide if you should change
banks. It is important for consumers to
stay educated and know how the FDIC
protects them. If you are truly concerned, you should evaluate your banking options.
How can consumers monitor their bank’s
capital position?
The Web site of the Federal Deposit
Insurance Corporation (www.fdic.gov)
includes financial information on all
insured banks. You can find your bank
on this site and with a little searching
find out how it compares to other banks
on many measures. Another source of
information for publicly held banks is
the stock analyst reports. One can also
review a bank’s financial reports.
DAVID JANUS III is the president and CEO of FirstMerit Bank’s Cleveland region. Reach him at [email protected] or
(216) 694-5658.
