Risk Rap

Rapping About a World at Risk

Reinventing Community Banks

Community Banks have been profoundly affected by the current crisis in the credit markets. Many will need to reposition their market focus and adopt innovative growth strategies to build its capital base and sustain profitability if they wish to remain independent.

Community banks have confronted drastic market challenges in the not to distant past. During the 90’s community banks dominance of the small and mid-size enterprise (SME) market began to erode. The dynamics of the banking industry changed rapidly. Large money center and regional banks leveraged technology, operational and balance sheet scale to provide access to inexpensive credit products bundled with cash management tools. They were armed with huge marketing budgets and became adept at selling a growing array of transaction services that met the growing sophistication and business needs of the lucrative SME market. The current banking crisis forebodes yet another drastic alteration in the structure, regulatory and businesses practices of the industry. The current banking crisis will forever alter the face and scope of community banking sector.

The challenge for the community bank will to reinvent itself. Community banks must decide who its customers are and target the market with focused precision. Community banks need to recognize its strength by leveraging its natural geographic advantages and sell products into markets that transcend local limitations. Community banks need to offer products that help SMEs manage cash flow and liquidity, make informed decisions on capital allocation initiatives, decrease cost of capital and products that facilitates transactions and fosters new customer acquisition.

Community banks must also begin to farm new liquidity pools. Securing funding sources in a world of limited liquidity will be the greatest challenge for community banks. Overcoming regulatory hurdles notwithstanding, branding community banks as a consistent, trusted and efficient delivery channel of credit products is an important ingredient for its survival. The community bank must recognize how it adds value in a complex and expanding delivery chain. The failure to secure funding sources will only accelerate balance sheet erosion that results in merging with another institution or liquidation.

The community bank must assure its funding sources, equity holders and regulators that it truly knows and understands its customer’s market and growth potential. This KYC goes deeper then determining an acceptable FICO score, Federal ID verification and passing an OFAC screen. Employing risk management and opportunity discovery exercises with SME prospects and clients are principal business drivers that provide critical disclosure information to funding sources that address risk aversion concerns.

Funding sources and other stakeholders must be secure in the knowledge that the community banker understands the peculiar risk characteristics of the SME’s strategy, business model and governance and risk management acumen to provide investors and lenders exceptional returns on investment capital and lines of credit. The banker then becomes an effective risk manager whose vigilance and considered business judgment provides a fair return to funding sources, assures regulators that capital ratios remain strong and reward shareholders with appreciating equity valuations.

Community banks are just one of the many expanding choices an SME has to provide banking and financing services. Community banks must create a compelling brand identity and articulate a differentiated value proposition with focused product marketing to regain its market dominance with SMEs.

You Tube Video: The Beatles, Money

Risk: Credit, Market, Banking, Small Business, Recession, Marketing,

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May 30, 2008 - Posted by | banking, credit crisis, rock, SME | , , , , , , , ,

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