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 Sue Zazon, president and CEO of FirstMerit’s Columbus 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 Zazon 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.
SUE ZAZON is the president and CEO of FirstMerit Bank’s Columbus region. Reach her at email@example.com or (614) 545-2791.