Question:What do you think is the greatest risk faced by minority owned banks?
Answer: The greatest risk to a bank, including minority-owned banks, is the failure to maintain sound asset quality. In recent years, regulators have stressed the importance of properly managing a variety of banking risks. As a career bank examiner, there is no doubt in my mind that the lending area poses the greatest risk to a bank, particularly a de novo bank. In simple terms, money is going out the door and only sound underwriting and credit risk management can ensure it will return. This simple tenant, though well known to bankers, can easily be lost in the heat of credit cycles, economic adversity, and intense competition.
Question:Why are banks so vulnerable to deteriorating credit conditions?
Answer: Banks play a special role in our economy. They provide credit to individuals and businesses that cannot otherwise access capital markets. They are able to fund this lending largely through the deposit gathering process which is made possible by FDIC insurance. When you combine these factors with relatively low capital requirements in comparison to other industries, the stage is set for potential problems. I’m fond of saying that the asset quality problems are contagious, insidious, and that they prey on the weak. They are contagious in the sense that through loan losses, their financial impact can quickly spread to earnings, capital, and liquidity. They are insidious in that you often do not know you have a problem until it’s too late. Today’s credit problems typically represent loans underwritten in prior periods, particularly true for de novo banks where the loan portfolio grows exponentially in the first few years. Finally, credit problems prey on the weak in that banks are vulnerable because they have relatively small amounts of capital to absorb unanticipated losses, again particularly true for de novo banks and many minority-owned banks where the average loan size is high in relation to capital.
Question: What can banks do to minimize asset quality problems?
Answer: Sound underwriting standards are key. However, credit risk management is also critical in situations where loans, even those properly underwritten, may be stressed by external factors. This is why portfolio segmentation and monitoring of portfolio concentrations has become such a hot topic, particularly in regard to commercial real estate loans. Too much exposure to any one industry or economic sector significantly increases risk. Since credit risk cannot be entirely eliminated, it is also important to maintain additional protection in the form of a sufficient allowance for loan losses and a sound capital position.