Is Your Bank Ready for a Shift in Gears

Not long ago U.S. economy kept perking right along and that made hard to heed regulators' credit cautions. Things change At an early fall meeting of bankers from institutions of all sizes, an industry lobbyist at podium asked all assembled what they were hearing from their examiners. Concerns about credit quality, and by extension, bank safety and soundness had been stressed in speeches of federal banking regulators' top officials out of Washington. But had those concerns filtered down to examiner-bank level? Not yet. The consensus was that field examiners weren't reflecting change in Washington's mood--a change that, in case of an agency such as Comptroller's Office, has been evident for more than a year. But that was scant comfort for one of lobbyist's listeners, a community banker from southeastern U.S. His bank had just been through a safety and soundness examination where stress had been on preparation for Year 2000 challenge. Frankly, he told his fellow bankers, it scares me to death that our lenders think we're as safe and sound as these examiners say we are. None of lenders that his bank currently has on board, he explained, has been with institution--nor been a lender--for more than five years. None of them has seen an economic decline, he says, where loans that looked good early on deteriorate or go completely wrong. The lobbyist asked his listeners if they had engaged in any of looser lending that regulators had warned against. Only one banker volunteered anything. We've been caving in on our usual practice of insisting on personal guarantees, said banker [However], don't recall that have ever collected on a personal guarantee anyway. An evolving mood With that discussion rendered inconclusive, matter was temporarily dropped. But in a month's time, mood of industry began to notably change, because of stock market crash and accompanying fears that economy would fall into a recession--or worse. Yet calls to some U.S. community bankers still don't jibe with picture of an industry that has thrown all caution to wind. When they spoke of seeing slippage in their markets, was on part of larger banks rather than within their own organizations or in banks their own size. I don't see erosions in credit standards in our part of state, but do see banks of all sizes cutting their rates to bare bones, said a Virginia community banker. Hardly basis for pessimism just yet. But here are some issues to consider: 1. Is your bank ready for a deflationary environment? CEOs around country might ask themselves a fundamental question: What knowledge and experience do they have in overseeing lending done in deflationary times? For much of leadership careers of today's bank CEOs--and certainly during formative years of many of them--deflation wasn't something anyone thought much about. Since 1970s, inflation has been financial world's public enemy number one while deflation went without a profile. A century ago, when business cycles were less understood and governmental influence haphazard to nonexistent, there were deflationary dips in cycles all time, notes Ed Furash, consultant. Furash, head of Furash & Co., Washington, D.C., explains that's why 19th century U.S. history is so dotted with various panics one reads about. Deflation drives down value of assets, which, among other things, means that collateral securing loans loses value. In event of a default, you won't be able to collect your loan at 100 cents on dollar, says Furash. No one's experienced times like that since before World War II, says Furash. Right now, he says, the whole question is whether economy we're seeing right now is a deflation correction or an exuberance correction. There are sectors of modern economy that remain open to deflationary risk, points out Keith J. …