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Clueless or Better Prepared?
Listening to impending predictions about a recession doesn’t help my mood. To pull myself together, I look at the bright side. And apparently, I’m not alone.
Brandon Koeser, a financial services industry senior analyst at accounting and consulting firm RSM, rattled off a series of disturbing facts about the current economic environment, including inflation and a potential recession during his recent presentation at Bank Director’s Bank Audit and Risk Committees Conference in Chicago. Then, he polled the audience of some 250 bankers on the outlook for their institution. Words like “positive,” “growth” and “optimism” prevailed. How weird. Bankers are either clueless — or they’re better prepared than ever.
The biggest banks in the country showed remarkable success in the face of a worst-case scenario — unemployment hitting 10%, home prices falling 28.5% and the value of commercial real estate falling nearly 40% from peak to trough — according to results of Federal Reserve-required stress tests released this week.
If you look at bank capital levels, we’re certainly in better shape, says Mark Fitzgibbon, Piper Sandler & Co.’s head of financial services research. The industry’s median core capital metric, the common equity tier 1 capital ratio was 9.46% in 2005, before the Great Recession began in 2007. It was 11.81% to-date in 2022, according to Piper Sandler. Community banks also look good. The community bank leverage ratio was 11.6% at the end of the first quarter, compared to a required minimum of 9%, according to the Federal Deposit Insurance Corp.
Additionally, banks have cleaned up their data to comply with the current expected credit loss model, or CECL, which has been a huge benefit to their stress testing capabilities. Small banks, even those as little as $250 million in assets, now stress test annually, says Peter Cherpack, an executive vice president at Ardmore Banking Advisors. If they need to test more often, they have better data and tools to do so, he says.
But even though Cherpack believes banks have better risk management tools than they had during the Great Recession, he’s a little worried some banks might not be as well off as they think they are. They sailed through Covid-19’s early years and feel good about their performance. The U.S. government pumped trillions of dollars in Covid-19 related spending and tax breaks into the economy. The resulting liquidity on customer balance sheets and appreciating assets gave businesses and consumers a buffer. But that may be about to change.
• Naomi Snyder, editor-in-chief of Bank Director
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