"Gulp!"
That was my last thought just as I released the safety catch and enabled access to the Move Your Money zip code search tool. It wasn't the accuracy of the system that worried me. IRA has been tuning it's risk modeling system to understand everything from Basel II analysis -- remember the days when the "global economy" would grow forever -- to FDIC failure risk triggers for the better part of the decade. The gulp was because I knew that the "why not me?" calls were about to start from the banks that didn't make "the list." Three weeks later and the phone calls have been non-stop. For the record:
You cannot ask to be on the list. You cannot pay to be on the list. You cannot ask or pay for the core IRA system to not evaluate your institution. If you are a bank and you file a CALL REPORT we will use that public data filed with a United States of America regulator empowered by the U.S. Banking Act -- these are evidentiary grade documents -- to run computations to determine what, if any, risk indicators are inherent within the banking operations of your institution. We do that for every bank to the best of our ability. We've got data on this for every quarter going back to 1995 and every year end prior to that to 1989. The system pinpoints in naked detail things that banks can be proud of and things that need attention. For you math wonks, when we built the indexing system that underlies the simplified letter grades, it tested with an R-Squared of 0.9. That's because we do a census not a sample. Oh if only the rest of financial analytics had shown such rigor maybe Nassim Taleb would have never had to write his "Black Swan" critique of the system.
The IRA process is mechanistic like a yard stick. It covers all banks. Yes we do cover the big ones too. Read The IRA Analyst edited by my partner Chris Whalen if you're in the mood for that stuff. From this universe we run a filter to identify the smaller banks with total assets less than $65 billion. From there we apply our stress tests allowing only the 'B' or better performers on the Move Your Money zip code list. Yes folks this is deliberately a conservative approach. The "why" is today's lesson in one of my favorite things, asymmetric warfare.
We decided on this path because strategically it's the best way to support a plural movement of consumers attempting to generate a grassroots impact serving the national interest. Consumers are not expert financial analysts; not that I believe professional financial analysts are much better mind you. My own main advantage in this world is I believe Dirty Harry's caution about "A man's got to know his limitations". So by concentrating forces on the "best of breed" and you've created a naturally risk managed avenue of advance for change. Think about it. MYM would not have worked if consumers had to contend with having to individually learn to discover how to detect good from risky banks as they made their decisions. The switching costs would have been prohibitive. The "killer app" as they call it in internet land is one that reduces transaction friction to zero. I say again. The IRA donation to this process was never designed to serve the interests of the banking industry but to serve the interests of ordinary people. The banks are the means not the end. I wish President Obama the best in transmitting the same message.
Two-thirds of all banks made the list, a number of them quite handily. What about the other third? They need some training up. And so begins the cacophony of stress.
Trumpeting loudly in the forefront of complainants at least until two days ago were the "de novo" banks. These are the new start ups of the banking industry. The FDIC statutes dictate these are bank less than three years old. There are just over 300 of these institutions at the moment. These banks are expected to execute business plans submitted to their regulator that will result in a stable profitable institution able to join the ranks of healthy "established" banks when their "de novo" period expires. It's a stressful uphill race that requires smart hard work to "get 'er done" and the IRA system correctly detects the stress artifacts of that challenge. They don't all make it. Like all start-up environments, the pudding does not always come out like the recipe says it will. Over the past three weeks I've had the pleasure of talking to a number of bankers and former regulators about the subject. Have no doubt that there are a lot of smart people working in this industry. I can't thank you all enough about the insight you've contributed in terms of evaluating years one, two and three of the "de novo" life cycle. It resulted in creating the Youngest Banks in America page. It shows the world all of America's "de novo" banks with the birthdates they first appeared on the FDIC records. It breaks them down by years of age and the expectations of them at each age. It identifies those that have reached break even and those that have made it to 'B' or better. As one would expect, the results are a mix. In this economic climate I am particularly impressed by anyone who can execute on their plans and beat the challenge. You should be too.
Also as expected, the next group calling in heavily are "established" banks that didn't make the list. They are the ones with C, D and F grades. Overwhelmingly these become consultative calls. They already know they have strikes against them. They're really more curious to know just how much the system knows about those strikes. And they're hoping for a free peek to glean some thoughts and maybe suggestions about their prospects. I offer what I can bearing in mind that there's a line that -- for both business and legal reasons -- cannot be crossed in casual conversations. They are beginning to get the message that when I say no to discussing things that are "privileged", forward looking or might require the filing of an 8K with the SEC it's because I'm looking out for them more than me.
At IRA, we can see what a bank's condition is plain as day. We can see where the trend line is going. What's always intrigued me most of all though are the little artifacts revealing how hard whoever is running that troubled bank is working. These phone calls have put a voice to that data and I have to say, if nothing else, being part of the Move Your Money process has greatly humanized the way I view these numbers. Personally, I've been a fan of what we call "banks on the mend" for a long time and hearing from the people captaining these banks this month has only strengthened my resolve to continue to work to identify workable systemic avenues to help relieve the stresses impeding these institutions. They've been forgotten on the sidelines of a titanic feud between the federal government and the money center/super regional banks. Still, with a little coaching, I do believe that a number of these "banks on the mend" will yet make it back to good health and rejoin the ranks of 'B' or better institutions.
Final note for the day is about credit unions. Status is we're still working on it. There are 8,000 of them. I fully expect they will spread out into stellar, struggling and yikes just like their bank brethren when all is said and done. Here's your anecdotal factoid on this. In the first week of 2010 ending January 8th, the FDIC closed one bank; during the same week, the NCUA also closed one credit union. The FDIC closed three more banks on January 15th. So it's not like both regulatory bodies aren't actively sifting through the flock. The FDIC has much larger staffing this year so they can sift faster.