Bank Failures: Management Can't Pass the Buck

Article excerpt

You can look on the agenda of almost any meeting of bankers and find two prominent topics. The first is, "The world is changing, the industry is changing, and at the end of the '80s banks will bear little resemblance to the way we presently see them."

A counterpoint to this cry is, "Back to the basics, or don't lose sight of the fundamentals -- that is, getting caught up in and overwhelmed by the exotica will cost the shirts off our back!"

This verbal sparring is often carried out with marketing and product managers properly looking into the future to the escalating rate of change, and those individuals responsible for asset quality pushing the fundamentals.

Chief executive officers can be found on either side of this issue, depending on how long it's been since they shot themselves in the organizational foot, how visible the scars still are, and how long their memories are.

With banks failing at record levels, the Federal Deposit Insurance Corp. running out of corporate body bags, and some of the bodies becoming either too large or too geographically concentrated to dispose of conveniently, it would seem that a number of CEOs have been aiming a good deal higher than their feet while playing Russian roulette!

Bank failures don't just happen. They are caused by management, whether by sins of omission of commission. We usually can count on one or more of our regulators to have an opinion about how we are to run our business, and here again we're in luck. What follows is a short but succinct extract from one of the Comptroller of the Currencyhs communiques. The wording may sound a little old-fashioned, but we should give them credit for trying.

"Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to foster and encourage speculation. Give facilities only to legitimate and prudent transactions. Make your discounts on as short time as the business of your customers will permit and insist upon the payment of all paper at maturity, no matter whether you need the money or not. Never renew a note or bill merely because you may not know where to place the money with equal advantage if the paper is paid. In no other way can you properly control your discount line or make it at all times reliable.

"distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious and frequently unsafe. Large borrowers are apt to control the bank; and when this is the relation between a bank and its customers, it is not difficult to decide which in the end will suffer. Every dollar that a bank loans above its capital and surplus it owes for, and its managers are therefore under the strongest obligations to its creditors, as well as to its stockholders, to keep its discounts constantly under its control.

"Treat your customers liberally, bearing in mind the fact that a bank prospers as its customer prosper, but never permit them to dictate your policy.

"If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it; never make a discount if you doubt the propriety of doing it. If you have reason to doubt the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you. The risk in such cases is greater than the profits."

Not bad! In four paragraphs he covered 11 Cs of credit: collateral, contingency, conservatism, customers, control, concentration, capital, creditors, constancy, capacity and, last but not least, character. In virtually every paragraph, we can read the causes of individual bank failures that have taken place within the last few years.

Notwithstanding the tremendous changes that have taken place in our industry over time, many of the fundamental requirements of sound and prudent management enumerated here are as valid and critical today as they were about 120 years ago, when these paragraphs were included in a message from Hugh McCullough, the first Comptroller of the Currency, to the managers of national banks, dated Dec. …