There are many steps to finding a good bank, or even a credit union, for your borrowing and other business needs.
- Talk to other business owners
- Get referrals from your CPA and attorney
- Interview with the business lender you might work with…and their boss
- Look for a good fit between what you need and what the bank or credit union has to offer
Once you have a few likely prospects, go to their website and if they are not privately owned, find the investor’s page on their website…but read it with a skeptic’s mind. Lately I have been looking back at conclusions drawn from previous banking crises to find lessons learned. To paraphrase George Santayana:
“Those who forget history are condemned to repeat it.”
Today I found an article that changed my mind about one of the criteria I would have recommended only one month ago about how to choose a bank. Do they meet and exceed the ‘well-capitalized’ threshold?
When you read their annual report or listen to the podcast of their quarterly call with the analyst, if they are well-capitalized they’ll brag about it. The typical wording goes something like this: “Our Tier 1 Capital Ratio is 14%, well above the ‘well-capitalized ratio’ levels.”
Luckily, I stumbled upon a 1997 article about the New England banking crisis. Joe Peek and Eric Rosengren, economists with the Federal Reserve Bank of Boston, attempted to answer the question:
Four-fifths of the banks that failed during the New England banking crisis were still classified as well capitalized two years prior to their failure. Within one year of failure, 28 percent still were well capitalized.
Peek and Rosengren concluded:
“As banks expand into new markets and products, they may encounter problems unforeseen by management. The FDIC Insurance Act has required more frequent bank examinations and encouraged banks to be better capitalized, but it is important not to assume that because of the capital requirements in FDIC Insurance Act, so-called “well-capitalized” banks pose little or no risk of failure.” (Emphasis added)
I still notice if they are well-capitalized. I just don’t put as much faith in it.