An Introduction to Covering Banking

August 20, 2021
Photo by Kevinjonah Paguio

The following is an excerpt from a Beat Basics Update by Heather Landy, Mary Fricker and Theo Francis and updated by Yael Grauer on covering banking. You can read the entire update to the ebook here.

An Introduction to Covering Banking: Challenges, Common Errors and How to Avoid Them

Welcome to one of the most exciting beats in business – at least at the moment. Wall Street aside, the workaday job of traditional banks had long been seen as staid and un-newsworthy, until banks of all sizes and in practically every geographic market got swept up in the latest crisis and started failing by the hundreds.

The banking beat encompasses a wide array of topics – some very specific to the industry (like bank regulation or lending trends) and some that involve the sector’s approach to more universal issues, like corporate governance reform, management succession, quirks of accounting, and changes in technology and consumer behavior.

Banking is an incredibly political topic. When investigating mismanagement, take care not to lump in the First Bank of Wherever with the Bank of America and Citigroups of the world. The CEO at the First Bank of Wherever probably was getting paid a lot less than the infamous “fat-cat bankers” who were taken to task in 2008/2009, and his or her bank probably was not very involved in the esoteric market instruments that were blamed in part for the downfall. That said, beware the small-town banker who blames his or her troubles on everyone else. Many small banks were reckless in their own way, making loans in markets they did not understand, or investing in securities that they hoped would produce outsized returns, or lending to borrowers who had no business getting credit from anyone. There’s no better evidence of all the trouble at small banks than the wave of small-bank failures triggered by the 2007/2008 financial crisis.

The Federal Deposit Insurance Corp. (which supervises thousands of banks and provides the insurance that protects consumers from losing their deposits when a bank folds) shut down four banks in 2019. Another way to gauge the health of the banking industry is the number of FDIC-insured institutions it has classified as “problem institutions.” This number has dropped considerably since 2010, when there were 884 on the “problem bank list.” The number in 2019 was only 51; however, there were 54 in the first quarter of 2020 alone.

Not all problem institutions will fail – and the FDIC never names here – but an expansion or contraction in the number of banks on the problem institution list can help you gauge the general health of the industry.

It took a while for the financial shocks of 2008 to work their way through the economy. (Similarly, it may take time for the effects of the 2020 stock market crash and the economic impact of the COVID-19 pandemic to work its way through the economy.) After 2008, some bankers continued to play a game of “extend and pretend,” hoping that distressed borrowers will recover enough to pay their obligations in full, when what the bank really ought to do is write down the value of the loan. But write-downs hurt the bottom line, so there is a natural tension in the way banks approach loan valuations.

Banks in your town may go away or get acquired. Look for the reasoning for this when it happens. Is it because small banks can’t shoulder compliance costs and are vulnerable to failures or takeovers? Are owners deciding to shut down their business as they approach retirement age? It’s always big news when a bank shuts down or a new owner enters the market.

Challenges and Common Errors

There are several challenges to bank reporting, some you can anticipate, some you cannot. This list of tips are designed to help prepare you in a way that will help limit the challenges and reduce the time you may take navigating them.

  • Like any specialized coverage area, the beat has a vocabulary of its own. (The banking terms glossary provided here should help on that front.)
  • Income statements and balance sheets for banks can be extremely difficult to interpret, even for business reporters with years of experience in looking at financial statements of other kinds of companies.
  • There are many categories and line items that simply don’t appear in too many places outside of banking; the size of bank financial statements can be intimidating, and deciding what to focus on can be tricky at first.
  • There are some concepts in banking that can be hard to wrap your head around. A loan is considered an asset, even though it represents money that the bank has temporarily parted with and that might not get paid back in full. Deposits are considered liabilities, even though they literally represent money in the bank – this is because the money belongs not to the banks, but to the depositors who can yank the money back out.
  • The income statement and balance sheet data that I think is most useful to point out, in general, is net income, revenue, net interest margin, loan-loss provisions/releases, non-performing assets and net charge-offs, and the Tier 1 risk-based capital ratio (see glossary).

Understanding the U.S. regulatory architecture is tough. Even the experts are baffled by our system, which compared with the architecture in other developed countries is very unwieldy. Here’s a quick cheat sheet on that:

  • State-chartered institutions (those that get their charter from a state banking department) are supervised jointly by their state chartering authority and either the Federal Reserve or the FDIC. (The bank can choose.)
  • National banks are chartered by, and supervised by, the Office of the Comptroller of the Currency (the OCC), which is a bureau within the Treasury Department. Under the Dodd-Frank Act, much of the work of the Office of Thrift Supervision, which separately chartered and examined thrifts, has been folded into the OCC (some of the work has been divided among the FDIC and the Fed.) Of course, Dodd-Frank also established several new bureaus, so in terms of structure, things are only more confusing than they used to be.
  • The Federal Reserve oversees state-chartered banks who choose to be part of the Federal Reserve System. Importantly, the Fed also oversees bank and thrift holding companies (which in turn might own chartered banks overseen by the Fed, FDIC or OCC), and Dodd-Frank gave the Fed supervisory oversight of all systematically important institutions, whether they are banks or nonbanks. the definition of what makes a non-bank company systematically important is still being worked out.

Visuals can be tough to come by. Beyond statistical charts and photos of bankers and ATM lobbies, it’s tough to be original in your visual presentations. But that makes it all the more crucial to find something unique. I try to think about what’s easy for readers. Instead of looking at a dull chart showing bank merger data, wouldn’t it be more interesting to make a map and show the number of bank deals that have occurred in each state or region?

Sources can be challenging to cultivate, but no more so than in other industries. You’d be hard-pressed to find a regulator or a lawyer willing to whisper the names of banks on the brink of failure; but if you have a general sense of who in your area is healthy and who is in trouble, you can do some deductive reasoning on your own when your friend who works at the front desk of a local hotel reports that a block of rooms has just been taken by a group from the FDIC.