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Signs That Your Bank May Not Be in Good Health
By Martin | June 10, 2009
Bank is increasing its CD rates. This could be due to liquidity problems, he said, or the institution may just be looking for money to do more lending.
Bank is selling more stock, which could indicate it’s falling low on capital, he said, or that it’s able to attract private capital.
Bank is pulling back further on making “ordinary loans.” You hear anecdotes or experience the bank doing so on loans for items such as cars or home improvements. This could mean the bank is looking to limit exposure to credit risk, or “be a prudent move to strengthen its balance sheet,” Papaioannou said.
Bank is increasing fees. This could mean it’s losing revenue from other business lines, he said, or it has a competitive advantage and can increase fees, while still retaining customers.
Stronger indicators of trouble, he said, include:
An increasing delinquency ratio, which refers to the amount of delinquent loans in relation to the amount of all loans, an indicator a bank is having trouble collecting on its loans, he said.
An increasing charge-off ratio, meaning the amount of charged-off loans in relation to the amount of all loans, indicating more of its loans are uncollectable.
A dipping liquidity ratio, which are cash holdings plus liquid investments (such as overnight deposits with other banks, short-term Treasury bills or bonds) in relation to total assets, meaning a decreasing cushion, Papaioannou said.
Topics: credit risk, market risk | No Comments »
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