Banks appear ready to weather recession

As the world’s financial markets look toward a potential recession, Colorado banks appear well situated to withstand the challenge.

“Capital levels remain really high,” said Jenifer Waller, president and CEO of the Colorado Bankers Association. “They remained high all through the pandemic.”

All in all, circumstances look a lot better for banking concerns than they did for banks prior to the 2009 Great Recession. Part of that is due to the Dodd-Frank Act instituted following the recession, Waller said, but part of it is due to extremely different circumstances.

The 2009 recession was largely due to banking practices, which Dodd-Frank addressed. “Today we are facing the fallout of the pandemic and high inflation rates,” Waller said.

The nation’s largest banks passed stress tests mandated by Dodd-Frank in mid-June, according to the U.S. Federal Reserve Board.

Even faced with $612 billion in losses projected by a severe recession scenario, their capital levels would remain well above regulatory minimums. That means banks have enough capital to weather that severe recession without withdrawing the supply of credit to the economy, according to the Reserve Board.

That also appears to be the case for Colorado banks, both large and small, all of which have to pass similar stress tests. The CBA includes banks of all sizes, including large national banks doing business in Colorado, but the local banks represented by the Independent Bankers of Colorado are also in good shape, said Michael Van Norstrand, the executive director of the IBC.

“I believe IBC member banks are positioned with adequate capital liquidity, safety and soundness, policies and procedures and local management nimbleness to meet ever changing economic conditions,” said Van Norstrand in a prepared statement.

“They certainly proved it during the once-in-a century pandemic and related downturn when community banks were the heroes in processing PPP (Paycheck Protection Program) loans,” he said. “Community banks remain poised to continue their role as the backbone of the economies where they operate, notwithstanding economic upticks or downticks.”

Waller said that there were initial concerns during the pandemic that delinquencies would become a banking problem. However, with the federal aid that was brought in, “that didn’t really come into fruition.”

Colorado Banks also fared fairly well in the Great Recession. Although there were some bank failures, Colorado had significantly fewer than national averages and even neighboring states, Waller said.

Even so, Colorado banks are in much better shape today than they were going into the 2009 recession.

As of this March, delinquencies remain extremely low, she said, with non-performing assets at only 0.18% in Colorado as of March of this year. In comparison, the ratio of nonperforming assets to total assets was at 4.78% in March of 2009.

Equity capital as compared to total assets was at a strong 7.7% for Colorado banks in March, Waller said. However Waller, a former bank examiner and a CBA employee since 1999, said a more important index looks further into loan portfolios to produce the total risk-based loans to capital ratio.

In March of this year, that index was at 14.36%, while in March 2009 that index was at 12.04%, indicating there is more capital in comparison to riskier loans.

 “I think we’re in line with the nationwide numbers,” Waller said. At the same time, the strength of the Colorado housing market is not predicted to suffer in the shallow recession that many economists are predicting.

“The situation today is very different than it was in 2009,” she said. “Banks have pretty good capital now, and that’s what Dodd-Frank requires.”

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