Easing the fear of a financial collapse by Trebor Banstetter MICAR The bank of New England failed in early January of 1991. It was the biggest bank failure in the history of the United States, and the financial catastrophe caused great concern among New Jersey residents who kept their money in local banks and thrifts. "The people of New Jersey were very nervous about the safety of their banks," said Dan Woods, business writer for the Record of Hackensack, N.J.
The fear was SO pervasive, Woods said, that a thrift in Patterson, N.J., had a "run de- positors withdrawing all of their savings because of a takeover by United Savings Bank, "There was poor communication, and people thought their money was going to disappear, he said. "We wanted to give them some information on how safe their bank was. Woods wanted to create a ranking of banks and thrifts that would assist consumers in choos- ing what financial institution was safest.
He decided to use a pub- licly available database provided by Ferguson and Co. The people of New Jersey were very nervous about the safety of their banks. We wanted to give the information on how safe their bank was. -Dan Woods The data was based on Federal Deposit Insur- ance Corp. call reports, which are detailed financial reports banks have to file each quarter. and are avail- able on a CD-ROM disk.
Obtaining the information from the disk and downloading it into it database program is very similar to using nine-track magnetic tapes. The best way to determine a rating for a bank or thrift. Woods decided. was to use a formula compar- ing an institution's capital and its problem loans. "In il failed bank, the losses from the problem loans keep piling up and eating away the capital. he said. Each bank's capital and problem loans was divided by the bank's assets to produce a percentage.
The capital percentage gave an indicator of how much the bank had saved over the years to act as w-a cushion of last resort. The problem loans indicated how good the bank was at making loans. The capital percentage and the problem loan percentage were given equal weight in the ranking. and were converted into the standard deviation to equalize the numbers. Then, each bank had a ranking between one and five.
"After the story ran. consumers were wildly enthusiastic, Woods said. "This gave them a way to judge the basic safety of their bank. One of the biggest concerns Woods had was making sure the story presented the data accurately and fairly. "We were very con- scious of the fact that people would use these ratings to move their money, SO we checked the data and methodology to the extreme. he said. He also pointed out banks and thrifts that had low rankings but good recovery pro- grams.
Woods made sure to include in- formation on deposit insurance. SO readers understood their savings were insured by the federal government if under $100.000. "We didn't want to cause hysteria." he said. In 1992 Woods did a second ranking. this time including several significant out-of-state banks. "Again. the response was overwhelming. The stories have won several awards, including a third prize in the enterprise category from the New Jersey Press Association.
They also won a C.T. Rutgers award for business reporting. Woods encourages others to try similar rank ings of financial institutions in their areas. but warns that extreme caution and care must be used. - If you print the wrong data. it can be devastating. he said. But. he added. "It's definitely worth the effort. I have received calls from senior citizens who told me they would sleep a little easier."