How to Decide Where You Bank

With so much hubbub about toxic assets and requirements for bank transparency, you want to think carefully about your banking relationships. I am a long-time fan of community banks for small business and individual accounts. Banks rooted in your city, or region, want to partner with local businesses. Your success contributes more visibly and directly to their success than it can in large financial institutions. If you’re active in your local business community, you’re likely to know a local bank is having problems long before it becomes public information.

When your incorporated business and/or personal accounts exceed deposits of $250,000, you need an advance warning if your bank is on a slippery downward slope so you can keep your balances below $250,000 in one bank. That is the maximum amount the FDIC insures against loss for an individual or corporation. 

As the world works its way through the ongoing mortgage meltdown, which is producing ‘toxic assets,’ and the unemployment crisis, which is increasing credit card collapse, the health of many financial institutions will remain in flux. Credit card defaults have been tracking along at approximately the same rate as unemployment, which is currently reported as 8.5 percent. However, Citibank reports: During the first quarter of 2009, credit card defaults leapfrogged up to 10.18 percent. Since banks usually impose loan-sharking interest rates at the 30 percent range following any late payment, in many cases the banks make it impossible for customers, who have lost jobs or who are struggling financially (for any reason), to pay their credit card bills. As unemployment  increases, along with punitive bank practices, credit card defaults will continue to rise.

If you cannot use a local bank because you need more capabilities than they provide, such as international operations, examine the quality of regional banks in your area. There are financially healthy regional banks, which did not engage in risky adjustable-rate mortgage (ARM) lending. These institutions can offer most of the same services provided by mega-banks and they rarely carry credit card debt. Do evaluate their fees carefully. John Brining Company, a venerable Gulf Coast-based small business engaged in custom house brokerage and import-export, recently sought a new regional banking relationship for its worldwide operations. The change was caused by exorbitant fees from their former bank. Pay careful attention to day-to-day and monthly charges that apply to your business.

If you must use major financial institutions for your accounts, research firm, Global Finance, recently released a list of the World’s 50 Safest Banks. Their list is culled from the 500 largest banks by asset size. They usually release this list annually. However, changes since mid-2008 have caused more than one-fifth of the banks on the 2008 list to drop off during the past eight months. The ongoing volatility of financial markets caused Global Finance to add an unscheduled “mid-year” update of its data. They researched evaluations of banks by credit rating agencies (See table below.) in addition to asset size. 
 
Fitch Ratings/                       Moody’s
Standard & Poor’s               Equivalents
AAA                                      Aaa
AA                                        Aa1
AA                                         Aa2
AA-                                        Aa3
A                                           A1
A                                            A2
A-                                           A3
Source: Global Finance

The top five spots in Global Finance's analysis went to banks in Germany, France and the Netherlands. Those were the only institutions to receive AAA ratings. These United States banks were designated among the world’s safest:
21. Wells Fargo
26. U.S. Bancorp
34. The Bank of New York Mellon
45. JP Morgan Chase
50.  BB&T (Branch Banking & Trust Company)
An honorable mention went to Northern Trust.

Canadian banks included in the 50 safest:
10.  Royal Bank of Canada
14. Toronto-Dominion
22. Scotiabank
32. Bank of Montreal
42. CIBC (Canadian Imperial Bank of Commerce)

When considering the best bank for your business, ask these 10 questions:

• Is your bank financially sound? See my column, Is Your Bank in Trouble?
• What services do you need your bank to provide?
• Which banks in your area offer the services you need?
• As your business grows over the next several years, will the bank continue to meet your goals?
• Do you like and feel comfortable with the people you will interact with at the bank?
• Is the bank conveniently located?
• Can you conduct most of your bank business online?
• How do fees compare with competitive banks?
• Will you feel at ease with your money in this institution?

Your relationship with your bank is a long term commitment. You want it to be as positive and stress-free as possible. Selecting an institution that meets your unique criteria should provide a solid foundation you can build on as your business grows.