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Keep the Lights On: Thoughts on Getting Through the Crisis

POV 04.21.2009

“Due to recent budget cuts, the light at the end of the tunnel has been turned off.”  Gallows humor like this is making the rounds, and it’s a good thing.  Poking fun at peril has a cathartic effect that clears the mind to respond. It also accentuates the shared nature of an experience. Every single banker in America is contending on some level with the financial and economic crises. The realization that you’re not alone tends to firm up resolve.

But even a clear head and strong resolve will be tested in the days ahead.  Most banks have survived the crisis so far, and many community or small regional institutions are still well-capitalized and in good shape, having never flirted with subprime lending or dabbled in high-risk investments in the first place.

But the crisis is spreading beyond liquidity problems to a broader economic crisis as businesses contract and unemployment soars. Banks large and small are bracing for the next phase, when home equity, credit card, and consumer loan portfolios deteriorate as more borrowers become unable to meet their repayment obligations.

Pulling Back

The Federal Reserve Board’s January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices found that nearly 60 percent of respondents had tightened lending standards on credit card and other consumer loans during the previous three months. Almost half reported having raised minimum required credit scores on credit card accounts and other consumer loans, lowered credit limits on new or existing credit card customers, and reduced the size of existing home equity lines of credit.

With this combination of higher credit standards and spreading economic hardship, 45 percent of the survey respondents said they had experienced weaker demand for consumer loans of all types during the past three months. Likewise, the survey found a further weakening of demand for commercial and industrial loans.

These figures may or may not reflect your own experience, as some banks have been affected more than others. Those in markets where unemployment and real estate problems are particularly severe are feeling the most heat. But there is positive news too.

Inching Forward

Banks are seeing slight improvements in loan production as consumers take advantage of falling prices and low interest rates. On the commercial real estate side, about 15 percent of domestic banks responding to the Fed survey “indicated that the shutdown of the securitization market for commercial mortgage-backed securities since the middle of 2008 has led to an increase in the extension of new commercial real estate loans at their banks.”

There is also guarded optimism about deposit production as consumers put the brakes on spending.  According to the Commerce Department, the personal savings rate reached 3.6 percent in December 2008.  During the last quarter of 2008, the personal savings rate averaged 2.9 percent after almost four years below 1 percent.

Community banks are also seeing an inflow of deposits as local customers move their accounts from large nationwide or regional institutions back to their hometown banks.

Deposits are also rising on the backflow of money market fund shares into insured deposits.  Small investors are comforted by federal deposit insurance, which the government increased to $250,000 per accountholder on an emergency basis through the end of 2009. And, with April 15 approaching, bankers are beginning to see an increase in tax-deferred individual retirement account deposits, which are permanently insured up to $250,000 per accountholder.

Now Which Way?

Despite some positive trends, and regardless of geographic or market variables, no bank is completely immune from the effects of the financial and economic crises. More bank failures are expected in addition to the 25 failures in 2008 (and the 9 more that occurred by early February 2009). How do you preserve your bank’s capital and assets, keep your balance sheet steady, and support your customers in this environment?

What you need is some creative thinking and a realistic action plan to keep your bank on course until the crisis eases, perhaps sometime in 2010.  Here are some thoughts.

  • Welcome Mat
    Look at your products and services with an eye toward making it easier for your customers and prospects to do business with you.  Introduce common-sense mechanisms for fast and easy fulfillment of customer requests for new accounts, certificate of deposit renewals, or loan modifications. Install an online loan application procedure (but be sure it is tied into your core system). Figure out how to enable hassle-free transfers from money market funds and out-of-town banks. Advertise how quick and convenient it is to do business with you, and emphasize the safety of insured deposits.
  • Focus on What You Do Well
    Take a good look at your bank to identify your organizational and market strengths. What products and services are the most popular and profitable?  Can you make them even better in terms of price, delivery, or convenience?  Then look at what doesn’t work very well, and consider migrating your customers to other products and services.  In today’s environment, it is generally better to perfect what you already have than to enter uncharted territory.
  • Reach Out to Existing Customers
    Take special care of your existing customers and make sure a competitor does not lure them away while you are courting new accounts. If you offer remote deposit capture, expand that channel so that more customers can deposit checks from their homes or businesses. Consider a call program to learn about customer needs and offer appropriate solutions. Brainstorm other ways to show customers that you wish to be a strong partner with them as they weather the crisis.
  • Take Advantage of Market Trends
    Catch the market winds blowing deposits back into banks by offering attractive deposit products and competitive rates and by educating customers about the advantages of federal deposit insurance for both regular deposits and retirement accounts. Use the opportunity to rationalize your core deposit product set by reducing the number of offerings to those that have distinct features and functionalities.
  • Make Good Loans
    The loosening of credit is the primary goal of the federal government’s financial rescue package. Although every bank in America is eligible, most community banks have declined to apply for bailout money because of the concern that customers would wrongly conclude they are unsound. But consider the independent thinking of one community banker in North Carolina.

Although his $800 million bank remained well-capitalized, he decided to accept $20.5 million in rescue funds.  He used the money to make mortgage loans to people who wanted to buy homes from developers who had borrowed construction money from the bank. The bank offered a low initial interest rate, adjusting after two years to a still-below-market fixed rate for 30 years, and waived closing costs.  The developers were so ecstatic about selling their inventory of homes that they added money to help cover the closing costs and joined in the bank’s marketing campaign.

With some creative thinking, your bank can contribute to America’s economic recovery by marshalling the resources available to you, sticking to the prudent lending practices that distinguish America’s community banks, and making good loans when you see them.

There are yet other ways to survive the crisis and come out stronger in the end. You can make better use of the technology you’ve already invested in, streamline processes and procedures to create greater efficiencies, and reduce expenses. So there is much to do to keep your bank on solid ground as the nation works toward economic recovery.

And when the light finally comes back on, it could be daylight that you see at the end of the tunnel.