Economy in Crisis: 3 Tips for Easing Customer, Employee ConcernsYou Need to Reinforce Safety & Soundness - and Keep a Close Eye on Risk Management
Here are three tips for your consideration.
1) Reinforce that Your Institution is Safe & Sound -- Community banks traditionally have had a unique, close relationship with their customers, says Steve Katz, a recognized thought-leader and former CISO at both Citibank and Merrill Lynch. "It's different for them, and the relationship reflects more on the closer, 'hometown' customer focus that community banks have with their customers," he says. "They just need to maintain their relationship with their customers and communicate with them."
The message that should be driven home: The vast majority of banks in this country are safe and sound - Wachovia and Washington Mutual are the exceptions, not the rule.
"Bankers should tell customers that [institutions] are required to have significant capital and reserves - that is, rainy-day funds for tough economic times," says American Bankers Association's Doug Johnson. "This is a bank's first line of defense to cover any losses." He adds that banking's capital, a rainy day fund in case of losses, is nearing a historic high. In June, the industry held $1.3 trillion in capital along with $144 billion in reserves for a buffer totaling $1.5 trillion. "If your bank is in that majority of 98 percent of banks that is highly capitalized, let your customers know it," Johnson says.
"The banking industry is diversified with more than 8,500 banks that have been in business for decades," Johnson explains. Even though there are 117 banks currently on the FDIC's 'troubled bank' list, Johnson says to look back to the 1988-1992 timeframe, when there were more than 1000 banks on the list. "From the depository banking side, we still don't see that level of turmoil," he observes. The ABA's letter for banks to give to their local newspapers basically says "There's no safer place for your deposits than in your local community bank. There's no reason to shift your funds to other places."
2) Point Out the Industry's Checks, Balances and Backstops -- The mainstream media coverage of recent investment bank failures, buyouts, bankruptcies and conversions has muddled the difference between FDIC-insured banking entities and investment banks. The ABA launched a nationwide ad campaign this week created to differentiate FDIC-insured banks from Wall Street institutions. The ads, which will be made available to member banks and the state bankers associations for placement in local papers, also reassure consumers about the safety of their deposits and the industry's strong capital position.
The FDIC's Deposit Insurance Fund provides an additional backstop for banks. The FDIC protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails. "No customer has ever lost a penny in insured deposits when a bank has failed," Johnson notes. "Depositors need to know that their money is insured for up to $100,000 per depositor per insured bank." This amount goes up to $250,000 for retirement accounts. The FDIC-insured accounts include savings and checking accounts, CDs, and money-market deposit accounts.
The majority of the banks on the FDIC troubled bank list will eventually work their way off the list, if history is any measure. According to David Barr of the FDIC, of the banks that made it onto the list in the past 25 years, more than 87% of them made it off the list. The 13% percent that did not were bought by other banks, acquired by the FDIC or closed.
What will happen to those 117 banks currently on the problem list? "Unfortunately what happens in situations like this, the banks will answer the liquidity problems at all costs. As a result, some smaller institutions will be taken over by larger ones, and during this time there won't be an eye on the data security issues inherent during a merger," notes Larry Ponemon, President of the Ponemon Institute, an information security and privacy research firm.
Which leads to the third key point ...
3) Don't Forget About Your Employees' Concerns -- Banks need to remember during all of these upheavals that they still have responsibility to their employees. These people are worried, seeing all of these takeovers and closings, and may be asking themselves, "Do I still have a job?" This is the time to reassure your employees that the bank is sound and their jobs aren't in jeopardy.
This is also the time for institutions to show that their banking practices promote confidence and trust, says Ponemon. "It's about customer and employee trust. When people begin to believe that their bank isn't going to be able to make payments to them, when they begin to believe they're not going to meet their commitments, a domino effect begins to occur," Ponemon says. "Other banking organizations should pay heed to what can happen when consumers begin losing confidence and trust in their primary banking organization."
Ponemon points to liquidity risk problems such as what WaMu faced before JP Morgan Chase bought it. This risk may be coupled with other vulnerabilities within an institution, including increased operational risks.
The systemic risks being seen in the investment banking side haven't hit the commercial and retail banking industry. More banks are implementing enterprise-wide risk management processes in place, Johnson says. These same banks are increasing the use of sophisticated risk-management procedures and stronger systems of checks and balances. Audit and internal control standards have been strengthened, and since 1991 the federal laws adopted have also increased and strengthened bank regulation. FFIEC regulators have also tightened examination practices with a risk-based approach to get banks and examiners to focus on the quality of risk management systems.
But those systems don't function effectively without good people behind them. Which is why, in your efforts to instill confidence in your customers, you can't overlook the employees who are just as uncertain and stressed.