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 firstname.lastname@example.org.