The Bank Soundness Question: What It Means for Agents

Many independent agents have watched with concern as a small number of high-profile banks have faltered during 2023.

Just what does this shock to the banking system mean to independent agents and brokers throughout the country?

The soundness of the banking system, frankly, is not something that most independent agency principals spend time thinking about. But since these issues have arisen, it’s important for agency leaders to navigate the issue. I see four takeaways as relevant to agents in the current environment.

1. The problems leading to the notable bank failures were specific to those few banks. America’s strong bank depositor protections responded to those situations, and healthy banks stepped up to absorb the assets and liabilities of the troubled banks. The protections in place worked. It appears that issues in the banking system have been contained.
2. While the distress has been limited to a few institutions, the rising interest rate environment of 2022-2023 has put many banks under pressure. Banks, which always face competitive pressure to offer favorable interest rates for deposit products and appealing credit terms for loans, now must do so in a market that is challenging to their earnings model.
3. The competitive pressures that all banks face will lead them to narrow their lending activity. For businesses such as independent agencies that present a different business model than other business borrowers, credit availability may be significantly curtailed.
4. Agents should speak to their financial institution and ask questions about deposit insurance protection, bank liquidity and capital ratios.

Many banks today face challenges to earnings and balance sheet strength. I expect there will be a fair number of banks posting lower profits in coming quarters. That’s a long way from saying they might fail, but it does mean they could change the way they operate. This could affect the way banking relationships work for independent agencies.

In this environment, independent agency principals may expect banks to shy away from lending for agency perpetuation, new producer development and acquisitions. New loans, when available, likely will cost more.

For years, I’ve seen many banks avoid independent agencies as borrowers. Bank lenders tend to have little appreciation for the enterprise value of an independent agency and tend to discount the value associated with an agency’s policy renewals, client retention, carrier relationships and loss experience. Faced with recent events and the forecast of higher interest rates, I don’t expect banks to suddenly change their perception of independent agencies.

Even as some banks tighten lending, institutions that truly understand the agency financial model will continue to be active lenders. Banks that exhibit strong earnings, liquidity and available capital will have the financial flexibility to continue providing capital to independent agencies.

Independent agency principals tend to be fiscally conservative. They’ve weathered crises large and small, and they’re used to sleeping well at night. It makes sense for agency owners to ask questions of the banks they’re doing business with. In addition to asking about financial soundness, now is a good time to ask about their current and future appetite for agency lending.

If you are an agency principal, there is one last point to consider about your own financial picture. Any agency owner who has taken out a loan in recent years should carefully review their loan terms and conditions. Numerous agency loans have been made at floating rates based on the prime rate. With interest rates sharply higher over the past two years, loan payments may be significantly higher. You can use the current yield curve to your advantage by thinking about refinancing to a fixed rate loan. In many cases, a medium-term fixed rate may be lower than the floating rate you currently have. A lender that is knowledgeable about the independent insurance agency channel can quickly identify opportunities to save on future interest costs.

Topics Agencies