Ever Happened to The Continental?
Joe Wheeler, Plansmith
not talking about the car; I’m referring to the bank. Back in 1984, then the
seventh largest bank, Continental’s failure forced regulators to recognize
that big banks could in fact fail and that they needed to find ways to cope with
that possibility. The bank’s demise sparked debate about how large and small
institutions should be regulated. Sound familiar?
management implemented a strategy focused on commercial lending. As a result,
they became the largest C&I (Commercial & Industrial) lender in the
country. This growth strategy, and the returns it delivered, was applauded while
stock prices doubled. Management and board were both referred to as
“superior”. Traditional indicators (ROE, ROA, etc) were considered
outstanding compared to competitors with the exception of equity which was only
a little lower.
one thing, their loan-to-assets ratio jumped 11% in four years. In this
particular situation, this suggested rising risk. (The higher number of loans
the greater risk of defaults)
second area quietly pointing to potential issues was Continental’s ROA. It was
stagnant. Couple this situation with
a rising loan-to-asset ratio and it points to the fact loans were being put on
the books at lower and lower interest rates. Remember back to that period,
interest rates weren’t just rising, they were atmospheric. Continental was
implementing a “below market” pricing strategy at the same time it was
opening the flood gates for loan growth.
forward to 2008 and consider IndyMac.
a heavy concentration in a few types of loans, construction and exotic mortgages
for example, creates exposure. While not commercially driven, IndyMac
specialized in Alt-A mortgages which didn’t require much documentation. The
forensics are still being completed, but we can assume credit losses that were
thought to be concentrated in subprime mortgages spread to other home loans and
debt once thought safe. One politician’s public concerns started a run on
deposits ($1B in eleven days) and the FDIC had to step in.
there’s no shortage of articles on, “What to do if your Bank fails”. The
by-product of IndyMac will be a knee-jerk response by regulators implementing
increased scrutiny of both banks and boards.
Are you ready?
been said that the best defense is a strong offense. Community banks have
traditionally stayed away from IndyMac-like lending practices. The problem is,
regulators are not differentiating. As
a matter fact, they see commercial real estate loan portfolios at community
institutions as the next big issue. Building
a strong offense now will help later.
expect board members to be “educated” and “informed” about their bank.
Giving them what they want can
actually have a positive effect
on overall performance.
not exhaustive, allow me, through today’s history lesson, to offer ideas you
can use to avoid repeating the past. Review, discuss and document your banks:
As Santayana said “Those who do not learn from history are doomed to repeat it.” It’s important to consider historical events that impacted the market. It’s also important not to encourage their replication. If you remember the Continental as a gas-guzzling antique with no place in today’s market, the only way you’ll go is up.