Jim Reber: Bill Shakespeare, community banker

Although I don’t remember it, it’s possible my high school English teachers pointed out to us that William Shakespeare, the greatest playwright of all time, actually had a side hustle. It doesn’t take too much of an imagination to hear some sound advice, wise counsel and seasoned commentary in the Bard of Avon’s writings. And, as it turns out, a lot of the material can pertain to community banking.

So as a courtesy to all the Shakespeare fans out there, here is a compilation of some of the more pertinent banking-and-finance passages, with some possible interpretations for their application to our industry. Who would have thought that Mr. Shakespeare dealt with some of the same issues that face community bankers in 2021? As we heard in Richard III, “Wear it, enjoy it, and make much of it.”

“If money go before, all ways do lie open”
—The Merry Wives of Windsor

I believe it’s internalized by ICBA members that creative, yet safe, lending practices have served their customer bases well. Custom-built financing benefits many parties. Of course, there’s the small business or the consumer who receives capital, and then there are the employees of the small businesses and the vendors. The Small Business Administration’s (SBA) Paycheck Protection Program (PPP) of the last two years have redirected many thousands of businesses toward community banks and away from those that are Too-Big-To-Fail.

“For his designs crave haste, and his haste good hope”
—Richard II

The average community bank’s bond portfolio is nearly 50% larger than pre-pandemic levels. Most, but not all, ICBA members have exercised discipline while building up their security holdings to remain compliant with their risk tolerances. ICBA Securities’ exclusive broker, Vining Sparks, offers a number of complimentary tools to take the guesswork out of investing and thereby be less reliant on hope and more on design.

“This is no time to lend money, especially upon bare friendship without security”
—Timon of Athens

I think the banking regulators in the 17th century (and the 21st, for that matter) would agree. Lending is generally good. Unsecured lending, unless to a full faith and credit institution like our federal government, not so much.

“Unbidden guests are often welcomest when they are gone.”
—Henry VI, Part I

Could it be that 1597 saw a stock-market crash and a flight-to-quality pattern by the good lords and ladies in England, resulting in a flood of liquidity into the banking system? In the U.S., deposits have grown by over 20% in the last year, and I’ve yet to speak with a community banker in 2021 who was seeking additional funds. Try as you might, it could be that these “guests” will be around for a while longer. Which leads us to…

“All that glitters is not gold, often have you heard that told”
—Othello

Faced with lots of liquidity, sketchy loan demand and shrinking margins, many community banks have purchased securities with much more price volatility than they’ve ever purchased before.

While this doesn’t necessarily foretell a massive market value drop, the collective postures of bond portfolios have more exposure to rising rates than usual. The good news is that credit risk as it relates to both loan and bond portfolios remains quite solid.

“Fortune brings in some boats that are not steered”
—Cymbeline

In what I contend is a triumph of capitalism, the broker-dealer industry has pivoted and produced a lot of bond structures that either didn’t exist in 2017 or whose supply was so minimal that they were almost impossible to find. Two that are more visible are taxable municipal bonds, and “prepay friction” mortgage-backed securities (MBS). Taxable munis comprised 8% of newly printed supply in 2017; last year, that share had grown to fully 30%. Prepay friction MBS are being effectively employed to normalize cash flow and help maintain net interest margins.

“I like not fair terms and a villain’s mind.”
—The Merchant of Venice

I think the Bard is suggesting that anything that seems too good to be true … well, you know the rest. Where this hits home (or the office) in the recent past was the rollout of the aforementioned PPP. Initially, many community banks were skeptical of the terms and of the SBA’s ability to administer the ambitious plan. As it turns out, ICBA members were very pleased with the outcome, both with community banks’ ability to cultivate new business and with the fee income that was realized. And finally&elips;

“The lady doth protest too much, methinks”
—Hamlet

Apparently, bank examiners were a thing in 17th-century England, too.