The China Syndrome


Overseas events can factor into enterprise risk management

By Karen Epper Hoffman

Community bankers have always done an excellent job of knowing exactly what is going on in the areas they serve, having their finger on the pulse of their regions. But as the world becomes increasingly “flat” and the issues in other parts of the world have a more pointed effect on even U.S. small towns, community banks may need to do a better job of thinking globally, while acting locally, some risk-management consultants say.

With serious economic troubles surfacing in China in recent months, even community banks on America’s Main Street need to take a closer look at how their customers may interact with businesses and markets in the Far East, some industry risk advisors say. According to at least one industry expert in macroeconomics, more community banks may need to consider taking steps to protect their loan and investment portfolios and their balance sheets.

“By their very nature, community banks invest and interact with customers locally,” says Steven G. Cochrane, managing director for Moody’s Analytics, based in West Chester, Pa. “The biggest factor coming out of the slowdown in China will be on commodity and particularly agricultural pricing.”

Indeed, Cochrane says that community banks that lend directly to agricultural producers, and the vendors and businesses that support them, will likely be the most affected by the ongoing issues in China’s economy. Agricultural commodities have been riding high for nearly a decade in the United States, he says, as the demand from emerging markets has grown.

In turn, those agricultural producers and their suppliers, largely based in the Midwest, have taken advantage of the rapid rise in commodity prices over the past several years. Fueled by demand and low interest rates, farmers bought more trucks and equipment, expanded and often went into debt. Now with interest rates rising and demand “coming back down to earth,” Cochrane says, community bankers in these heavily agricultural regions need to look more carefully at their new and existing borrowers.

“In the Midwest, these direct lenders to the agricultural producers know their clientele and the land,” he says. “But they need to understand more of the details on the balance sheets of their borrowers and their expenses.”

Cochrane’s area of focus as an analyst is macroeconomics, particularly as it relates to the U.S. regional economies. Along with help from Moody’s Analytics, an ICBA Preferred Service Provider for loan management software, Cochrane helped organize a community banking conference last fall, which pointed out how the slowdown in China’s economy and other global issues could impact community banks in the Midwest as well as other regions of this country.

“The biggest factor coming out of the slowdown in China will be on commodity and particularly agricultural pricing.”
—Steven G. Cochrane, global markets expert

For example, states including Alaska, Idaho, Oregon, South Carolina, Texas and Washington will likely be the most sensitive to fluctuations in export conditions with China, according to Mayra Rodríguez Valladares, managing principal at MRV Associates, a New York-based capital markets and financial regulatory consulting and training firm. Meanwhile, wealthier states such as California, Virginia and New York may be more affected by stock market swings from the fallout from China’s own erratic markets.

But Cochrane believes that the American Midwest, especially in farming states such as the Dakotas, Minnesota, Nebraska, Iowa, Kansas and Oklahoma, will likely be the most directly impacted. In particular, banks that lend to agricultural producers who deal in wheat, corn, soybeans and other heavily traded commodities (not as much livestock) will be affected.

“Community banks that work with these agricultural producers will have to be very cautious now and try to better understand where [commodity] prices are going,” Cochrane says.

For many years after the financial crash, these regions had been the most financially stable regions in the United States, but now, Cochrane says, that now things are “turning on their head.” He is seeing greater income and economic growth in the Pacific Northwest and Mountain West regions, which are more economically diversified or deal in exports that have been more stable.

“We have been seeing this extreme volatility in equity markets since the beginning of the year. It’s been all about uncertainty,” says Cochrane, adding that there is still room for optimism. “The economy in China is still growing,” he says, “just slower than expected.”

Karen Epper Hoffman is a financial writer in Washington state.