I
received an e-mail earlier this month from the CEO of a state-chartered bank
who was upset about the publication in a newspaper of bank ratings by a
for-profit company.
“The
newspapers write about them [ratings] as if they are from regulators,” the
banker wrote. “This type of unfair
coverage is really hurting public opinion for us.”
Numerous
companies analyze, rank and rate financial institutions, and market neatly
packaged products based on this information.
These companies have been in business for many years.
Msnbc.com
is publishing information on the “troubled asset” ratio of the 400 largest
banks and thrifts in the
Msnbc.com
is working with the Investigative Reporting Workshop at
The
“troubled asset” ratio measures non-current loans and OREO as a percentage of
Tier 1 capital and loan-loss reserves.
The ratio has been used in the past by a former business reporter who now
is senior editor at the Workshop.
Public
and news media interest in such rankings, and the media’s publication of its
own analysis, are to be expected. This
has been a period of elevated stress in the financial system and of intensely
reported failures of commercial banks, thrifts and large financial services
companies.
Bank
and thrift rankings, regardless of the provider, are the product of a common
objective: To use detailed performance
measurement data – for example, ratios – and varying methodologies to quantify
the relative financial strength of a financial institution, and then to report
these findings in a format that is simplified for the general public.
In
other words, rankings and ratings are easier for the public to comprehend and
easier for the news media to report.
If
you are a banker worried about a reaction to the publication of bank rankings
and ratings, or to negative coverage by the news media of the industry, I
recommend you tell any customer expressing concern that:
§
The companies
providing rankings and ratings are not the government agencies that have
regulatory oversight of insured financial institutions as well as exclusive
access to important qualitative information about these institutions.
§
While bank and
thrift ratings and rankings compiled by companies or the news media can be
relevant to an investor or creditor, an insured customer can ignore such
information. No customer has ever lost a
penny in insured deposits when a bank has failed in this country. A borrower’s loans continue to be serviced
after his or her insured lender fails.
§
A single ratio
provides only limited information about the overall condition of a financial
institution.
§
A relatively low
rating does not mean regulatory intervention is likely for the
institution. Such a rating indicates
only that certain below-average performance factors were present during the
rating period.
§
Financial
institutions can – and, in most cases, do – overcome problems with improved
management and closer regulatory supervision.
These institutions have the ability to raise additional capital, cut
expenses, sell assets and seek a merger partner.
A
bank should be proactive in communicating with customers about deposit
insurance. A depositor with questions
should receive clear-cut, thorough answers and be referred to the FDIC, if
necessary.
When
a community bank or thrift does fail, it is a difficult experience for the
institution’s employees and their families, the management team, board of
directors and, of course, the stockholders.
Fortunately,
there is an orderly process in place to minimize the impact of the failure of
an insured financial institution on its customers and the local economy. Typically, another institution assumes the
bank’s deposits and reopens the bank’s branches the next business day.
The
goal of this process is to make the transition for the customer as seamless as
possible and to revitalize a key economic “engine” – and, often, a leading
corporate “citizen” – of the community.