No Safe Havens? Analyzing Banks for Signs of Trouble

Welcome to the May 2023 edition of our newsletter!  In this issue, we’ll examine how to research banks in a time when instability and volatility have gripped the sector.

Stressed Out: Looking for Indicators of Trouble at Banks

In recent months, leverage concerns and other problems at banks once thought to be reliable stewards of customer assets have made much of the sector trade like meme stocks.  As investors or as clients seeking to conduct transactions, how can you protect yourself in times of increased risk?

As part of the Federal Reserve’s stress testing mechanism put in place after the 2008-2009 financial crisis, banks must publicly disclose the results of such tests, as must the Federal Reserve.  These results may be published on a bank’s web site, or may need to be specifically requested by an individual.

Additional due diligence an investor or customer can take is to have insider trading patterns of executives at publicly traded banks analyzed. Have insiders, such as those leading the company, been selling shares at an accelerated pace when compared to more sanguine periods?  Did they announce any results or action, such as withdrawing a planned merger, which might indicate a reason for concern – and thus a reason for their share transactions?

Volatility in the normally “safe” banking sector may persist for a while, and most customers and investors can’t simply sit back until the storm passes.  But with the right amount if due diligence, better decisions can be made and major risks possibly averted.