By Michael L. Stevens, GSBC President
This is the second in a series of articles from GSBC’s Peer Group Projects. The projects are the work of our first-year class from July 2021. One group, comprised of nine bankers, chose to explore the actions banks can take to mitigate the risk of asset bubbles.
This is a good follow up to the recent article we published on inflation which was based on another peer project. The article emphasized the actions to address inflation are difficult and have lingering consequences—the bursting of asset bubbles easily among them.
The rising prices of many asset classes has been widely reported. The group starts their paper with a quote from Thomas Jefferson, “I like the dreams of the future better than the history of the past.” This is an inspiring and optimistic tone for a politician running for office, but probably not prudent for a community banker having to live with the risk they create for the bank’s balance sheet.
The peer group suggests Warren Buffett’s view is probably more aligned with the reality of a community banker: “Be fearful when others are greedy. Be greedy when others are fearful.” Our peer group believes this may be the opportunity for banks to forego future losses at the expense of some amount of current income.
Here are the top recommendations for community bankers in the current environment based on the work of the group:
In hot markets, competition can be fierce with new players entering the market. Do not let this erode lending standards.
Hold firm to the bank’s lending policy and be weary of pushing to maximum loan to value (LTV).
Increase the monitoring of the loan portfolio and collateral values.
Package and sell residential mortgage loans on the secondary market. This provides an immediate income stream while avoiding the risk of a bursting bubble.
Provide additional scrutiny of the loan loss reserve model. Sufficient reserves are essential.
Be more conscious of non-guaranteed, private label mortgage-backed securities. Only securities with a strong LTV and structure should be considered.
Educate the borrowers. This sets community banks apart from the competition.
Help borrowers increase their credit rating. This will position them well for the next best borrowing opportunity.
The group provides sound advice not from a perspective of retreating but of holding true to sound principles and good risk management. Strength in times of challenge only enhances opportunity.
The collaboration of our students is yielding valuable insights and ideas. We look forward to sharing a few more revelations in the coming weeks. We are eager to welcome our students back to the University of Colorado Boulder on July 17 when we will lay the groundwork for more discussion, debate and insight.
Peer Group Acknowledgments:
Worley Aitken, F&M Bank, OK
Shane Engleken, Bank of Colorado, CO
Joe Fanning, Bank of the Flint Hills, KS
Derek Hill, FirstBank, CO
Paul Kipple, American National Bank, NE
Matthew Manley, Arvest Bank, AR
Steve Pich, Bank of North Dakota, ND
Jack Schneider, Bank of Colorado, CO
Kileigh Sperber, ANB Bank, CO