05 Feb Invictus Bank Insights – Jan 2019
By Adam Mustafa, Invictus Group
Rising interest rates are already causing pain in the community banking industry. The most visible sign is the increasing cost and diminishing supply of deposits. But there are additional problems bubbling beneath the surface you cannot see with traditional bank analysis. A Perfect Storm is forming, though how long it will last and when the eye will arrive is uncertain.
By Adam Mustafa and Leonard J. DeRoma
Every community bank should assess its own situation and business model before deciding to opt in to the proposed new community bank leverage ratio (CBLR) framework, regulators advised banks in a December teleconference.
The CBLR framework would consider most banks with assets of less than $10 billion and at least a 9 percent leverage ratio to be well-capitalized, allowing them to forego risk-weighting calculations, file simpler Call Reports, and bypass future risk-based capital rule changes. But that doesn’t mean it makes strategic sense for all community banks.
Rising interest rates, increased competition for deposits and CECL implementation are among the issues that will be monitored closely by bank supervisors in the coming months, the Comptroller of the Currency revealed in its latest Semi-Annual Risk Perspective. The OCC noted that “untested depositor behavior,” coupled with changes in technology, will make it difficult to forecast liability costs. Bankers should also be aware of easing commercial credit underwriting practices, the need for sound CRE concentration risk management, and the strategic and operational risks that may accompany CECL implementation. Community banks especially must be aware of how liquidity requirements for the largest banks may increase competition for stable insured retail deposits.