I was once in a gathering of well over 1,000 people at an economics meeting in a New York City hotel when suddenly the fire alarm started to wail. But instead of rushing for the exits, audience members remained in their seats, assuming it was a false alarm.
Are there similar situations that could affect community banks? Are there potential trouble spots that we ignore because we are confident they will never affect us?
Sure, we have seen banks and thrifts fail because of stupid or dishonest loans. And we have seen banks forced to sell because of injudicious holdings of government bonds!
But are there smaller things that should keep community bankers awake at night?
For instance, your customers could be investing in volatile stocks through the Internet that could wipe them out in minutes. If your bank has extended a loan to that person, guess who will be holding the bag when he declares personal bankruptcy?
Other issues that community bankers should be thinking about:
Business borrowers whose profits and ability to repay loans are based on the continued bull market. The "wealth effect" makes people buy goods they normally would not even consider - and will likely stop buying if the market turns.
Employees whose bad judgment or need for power is making them gamble with the bank's money. A bad loan could wipe out capital just as quickly as "rogue traders" have wiped out several veteran financial houses recently.
Lending officers with too much control over our fate.One bank in Indiana fired a loan officer who underwrote foolish credits. But instead of getting rid of him immediately, it gave him a few weeks to get his affairs in order, and in that time he made more bad loans out of spite.
Your bank's reputation. I remember in Providence, R.I., a TV station wanted a picture to go with a story of a bank failure, so it went to a local bank that had nothing to do with the situation and took footage of people entering. The next day that bank had a run.
The risk manager of one major bank told me that, despite derivatives, bad loans, etc., he worries most about threats to the bank's reputation.
Credit cards. In the old days, banks would at least be forewarned if customers were in danger of defaulting because they would continually fall behind on payments. Now customers go from one lender to another-paying off one card with the next, until without warning they use up their last credit resource.
Can community banks do anything to avoid such disasters?
One suggestion is for the board and top officers to hold a "worst-case scenario" planning session.
What are some of your thoughts on this? What are the worst things that you feel might hit your bank?
Let's make this our latest contest for the presidency for a day of Schmidlap National Bank.
You may be doing fellow community bankers a favor.