First of three parts
As author of a recent book about the failure of more than 3,400 banks since the 1980s, I read with great anticipation the May 24 American Banker article entitled "Fed Reveals Secret Lessons Learned of Successful Banks."
In a nutshell, here are the "secrets" discovered by the Federal Reserve Bank of St. Louis in its study of "thriving" banks:
- Be smaller than $100 million in assets
- Locate in a rural market
- Hold more securities and fewer loans on the balance sheet
- Avoid commercial real estate and construction and development loans
- Hold more consumer, mortgage, and especially agricultural loans
- Have a lot of core deposits
When the bankers of the top banks were asked by the St. Louis Fed why their banks were so successful, here is what the bankers said:
- Strong management
- Conservative lending
- Directors who don't try to "run the bank"
- Business plans customized to the market
- C-corporation structure
Perhaps the most intriguing comment in the American Banker article is this quote from one of the authors of the paper: "The guys that we talked to could run a good bank just about anywhere."
Although the Fed's paper may add new insights into the debate about why banks in the U.S. succeed, I find the paper actually raises more questions than answers.
Here are four questions for the Federal Reserve Bank of St. Louis.
How sure are you that local ag and energy economies are really the key to the success for thriving banks?
The corollary questions are: Since California, Florida, and North Carolina are among the top ten states in the country in ag production as well as the number of community banks located in rural markets, doesn't it stand to reason that they should have top banks too if the Fed's conclusions are correct? Two other states Washington and Georgia are the 12th and 14th highest producing ag states in the nation, so why did more than 100 banks fail in those two states over the past five years?
Is the Fed researcher right when he says that the great bankers he interviewed could run a bank successfully anywhere, anytime?
The corollary questions are: Are you really sure about that? Do you have evidence that shows any examples of great bankers moving from Iowa, Massachusetts, or Texas to less benign markets like Florida, Georgia, or California? If it is true that the nation's best bankers are concentrated in a few states, should directors of banks in low-performing states like Georgia start recruiting CEOs en masse from places like Iowa? Do the skills needed to run a rural bank in Iowa translate into running midsized banks in urban markets like Atlanta or Los Angeles?
What is the role of a bank director?
The corollary questions are: Is the Federal Reserve Bank of St. Louis implicitly endorsing a low profile role for bank directors? How do bank regulators, including the Federal Reserve Bank of St. Louis, know when the CEO has too much power and the board is basically just in place to rubber-stamp? If great banks' directors do not and should not "run the bank," why then does the FDIC sue directors of failed banks for basically failing to run the bank?
Since the Fed used highly confidential Camels ratings to compile their research (which no one can replicate, since the Camels ratings are confidential), what lessons did the Fed learn about the usefulness and accuracy of Camels ratings?
The corollary questions are: Based on your research, how confident are you that the Camels rating system produces accurate, reliable scores? What was the exact number of banks in 2006 with Camels composite ratings of 1? How did the number change over the next five years? How many banks that failed between 2008 and 2013 had a composite rating of 1 in 2006? If the Camels ratings are useful, why is it not a more effective early-warning system as evidenced by the more than 3,400 bank failures that have taken place since U.S. regulators introduced Camels in 1979?
Like the Fed's research, my analysis of U.S. banking explores the wide variability that existed in bank performance from 2008 to 2012. Unlike the Fed, however, my study considers failed banks in addition to top-performing banks. My findings, as a result, are different from the Fed's. This will be the subject of my next post.
Richard J. Parsons is the author of "Broke: America's Banking System Common Sense Ideas to Fix Banking in America," published by the Risk Management Association. Parsons spent 31 years at Bank of America.