How to Tell If Your Bank is Safe, Sound, and Solvent

…or at least get some idea about it.

And I am not referring to Letterman’s Top Ten from January 1991.

While the banking crisis may have subsided in the news media, the danger to large depositors, especially businesses, is still there. Truth be known, it always has been there. The recent activity concerning some banks in the too big to fail category simply underscores how soon we forget and collapse back into familiar territory.

As an old banker, I looked at a lot of audited financial statements of commercial customers. Companies that engage CPA firms for external auditing often find in the comments and recommendations of their audit reports the statement that the company has amounts of money in a bank more than FDIC limits. Further they recommend the companies lower the amount of cash they keep in any one bank thereby reducing the amount at risk should a bank fail.

This is a leadership matter for the business owner, the entrepreneur, the CEO. Knowing your numbers and knowing them cold also includes knowing the numbers of your bank or credit union to protect your assets.

Accounts receivable is the single most volatile asset on a business balance sheet. Whether on a cash or accrual basis of accounting, those receivables must be collected in a timely manner. You have extended credit to your customers. Failure to collect accounts receivable always results in losses, deterioration of capital, lower stock prices, and net worth.

Cash in a bank is also an account receivable of your business. It is your money the bank owes you and anything above the FDIC limit is at risk. And as we have seen, it can happen practically overnight. Arguably, your cash in the bank may in fact now be your most volatile asset.

Just like you are careful to extend credit to your customers for your products and services, looking at the creditworthiness of any bank you wish to do business with is also something to look at closely. How to go about doing that is the challenge. Asking the bank is not a good idea.

When you borrow money from a bank, the bankers crawl up your butt with a microscope because they want to ensure you can pay them back.

When you deposit money into a bank, especially in amounts above FDIC deposit insurance limits, you have every right to crawl up their butt.

If I don’t loan you money, you get mad. If I loan you money and you don’t pay me back, I get mad. Better that you get mad.

What I am focusing on here are the services available, for any business or any consumer that seeks to dig into the relative safety, soundness, and solvency of their financial institutions. It really isn’t that difficult to do. It does however take a little time and education.

One word of caution…these services are not foolproof nor is there any guarantee that they are 100% accurate. Nor are they 100% free.

If you, or somebody in your company is a data junkie, I recommend going straight to the source of all financial institution data and that is the Federal Financial Institutions Examination Council Central Data Repository’s Public Data Distribution website.

Every bank in the USA has their quarterly Call Report available for download in Portable Document Format (PDF), Semicolon Delimited Format (SDF), or eXtensible Business Reporting Language (XBRL) format. Bulk data is also available for all call reporters in Tab Delimited format or eXtensible Business Reporting Language (XBRL) format. These things make sense to the seasoned data junkie.

Uniform Bank Performance Reports or UBPRs, which are based on Call Report data, are also available online. This compares your bank to its peer group banks as determined by federal banking regulators. You can see where your bank ranks compared to its peer group.

You can view UBPR reports and export the data to a delimited file for further use in Excel or as an eXtensible Business Reporting Language (XBRL) file for use in XBRL enabled tools, whatever that means.

The challenge is understanding the data for capital, liquidity, profitability, deposits, loans, past due loans, etc., and what it means to you as a business owner. However, it can be done. It is simple however not necessarily easy at first. Some instructions and tutorials are available online.

It is extremely important to remember, this data is backward looking. Each call report is generally available 45 days after the end of a calendar quarter and UBPRs some weeks after that.

It’s like sitting in the back seat of a car looking out the back window and yelling, “Stop! Stop! We’re gonna have a wreck!”

There are also companies that gather that same data from the publicly available FFIEC website information and assimilate it into concise reports by their professional data junkies. They also may incorporate SEC information for the publicly traded banks.

While there are others, and I do not recommend any one over another, I will list three of them here that I am familiar with. They are Weiss Ratings, Veribank, and Bauer Financial. These company websites have a search feature making your bank or banks easy to find. They explain their rating system and make their disclaimers, etc.

They also show how many stars they give a bank or provide a letter type rating (A, A-, B). This is just for convenience and “at a glance.” However, the devil is always in the details. I still recommend digging into the data on a regular and periodic basis.

Their detailed analysis and reports are available for a price and are generated by systems and people that already know how to handle the data and present reports. You or somebody in your company must learn to understand what the reports are telling you.

Again, these and the other companies that do similar reporting and rating are looking backwards. I do not know if they offer any future or expected trends.

Again, this is not a matter of whether your bank is safe or not. This is a leadership matter. Your duty as a leader is to look at everything with a leadership bias. That includes where your own financial statements and your management of your company’s assets and liabilities are concerned.

Create or cause to be created a system or method of ongoing monitoring of your bank’s financial condition, including liquidity. It’s OK to keep more than the FDIC limit in any one bank so long as you know and understand the risk.

“Experts can be helpful, but they’re no substitute for your own critical thinking and discernment.” ~ Steven B. Sample, author, the Contrarian’s Guide to Leadership