‘Stress test’ may put public on more even footing with banks

By Nicole Lucht

Friday, April 24, 2009 | 2 a.m.

It will be interesting to see what method the federal government is using to assess the health of the nation’s top financial institutions.

The Federal Reserve and other government agencies are expected to release their method of stress-testing the nation’s top financial institutions, Bloomberg News reported April 16. The hope is that by releasing the methodology before the results are released, the public will have a chance to digest it.

The regulators will consider “off-balance sheet commitments, earnings projections, risks of the banks’ business activities and the composition and quality of their capital,” according to Bloomberg.

Until now, there have been few reliable methods available for the public to assess whether a bank is equipped to survive this recession. Sure, we can take a look at quarterly and annual reports, but what do all those numbers really mean?

If, in early May, the government does indeed release its method of analyzing whether a bank has enough capital to cover its loan losses, then that could perhaps serve as a model for us to better analyze our local community banks.

Maybe I’m biased because I cover the Las Vegas banking industry, but I really do think the public is starved for true measures of a bank’s health.

Banks are all for free-market capitalism — so I say, let the free market reign. Give us, the consumer, the investor, the public at large, a reliable means to fairly assess the health of banks.

Stephen Miller, chairman of UNLV’s economics department, said the government is “stress testing” financial institutions to determine what would happen to banks’ equity if the troubled assets failed to perform.

The troubled asset ratio is relative to capital plus loan loss reserves, and that is a small fraction of total assets, he said.

“If all of those troubled assets went bust with no return, then it would wipe out their equity,” he said. “(But) troubled assets doesn’t mean that they won’t get any money out of them at all or that they won’t recover.”

Some bankers don’t want the public to rate banks. One of the talking points the American Bankers Association encourages its bankers to use on reporters is to compare rating banks with yelling fire in a crowded theater.

I disagree with that analogy.

If a bank is in peril — on fire, if you will — then why not let the public know? Then they, the consumers, investors, et al., can make an informed decision on whether to support that bank through deposits, loan requests or share purchases. Banks can see our credit scores at will, and use them to size us up, so really, why can’t we see theirs?

The Investigative Reporting Workshop has a great Web site that sizes up every bank that reports to the Federal Deposit Insurance Corp., offering up a troubled asset-to-capital ratio, something I reported on two weeks ago. That site can be found at banktracker.investigativereportingworkshop.org.

In other banking news:

Community Bancorp, the Las Vegas-based parent company of Community Bank of Nevada, is expected to release its 2008 annual report in mid-May.

The report has been delayed as it finished its financial statements and audit, the company said.

“We believe the board of directors and management of the company have implemented a very aggressive strategy to address the challenges in this economic cycle, including plans for strengthening our capital, earnings, and asset quality,” Patrick Hartman, the company’s chief financial officer, said in a statement. “As always, we remain committed to producing accurate and reliable financial statements in order to keep the public informed of our status.”

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Nevada State Bank acquired the banking operations of Great Basin Bank of Nevada after state regulators seized it bank April 17.

The transaction includes about $220 million in deposits and $238 million in assets, including the loan portfolio of the Northern Nevada bank.

The Federal Deposit Insurance Corp. will make an initial payment to Las Vegas-based Nevada State Bank, with the FDIC assuming 80 percent of the first $40 million of credit losses. The agency will also take on 95 percent of any credit losses in excess of $40 million, according to the bank.

Nicole Lucht covers health care, workplace and banking issues for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached at 259-8832 or at [email protected].