Woonsocket is home to the nationally known bank-rating company Veribanc Inc. Suffice it to say that Veribanc’s president, Michael Heller, and his staff have been busy in the last few years as shockwave after shockwave hit the financial industry and money managers, consumers and bank have sought assessments. Heller answered five questions about the business.
PBN: What is the business model for Veribanc Inc.?
HELLER: Veribanc was established to provide consumers, businesses and government entities with a plain English way to assess the safety and soundness of their bank, thrift or credit union. We offer a no-conflict-of-interest guarantee. We can do this because we charge our customers for our service. No bank, thrift or credit union has ever paid us to rate them. Nor have we ever accepted advertising, finder or click-through fees from the institutions that we rate.
PBN: On the Veribanc Web site, the firm touts its rating effectiveness versus the false-alarm rate. What allows Veribanc to be more accurate in rating banks?
HELLER: Our rating system derives its effectiveness from the quantitative analysis of thousands of bank failures. We do not incorporate peer grouping. In bad economic times the highest member of the peer group may appear to be strong when in fact it is only the strongest of a weak group. Our analysis extends well beyond generally accepted ratios. Veribanc’s criteria have been developed by extensive research into failures.
There is not much value in a rating system that has 50 percent or more of the institutions it rates in one of its lower categories. That type of system does not track the actual performance of banks over the past 30 years. Neither is there much value in a rating that has been paid for, directly or through advertising fees, by the vary institution being rated. Our business model contains no inherent bias since no institution has ever paid us to rate it. We do not claim to be perfect – just optimally tuned.
PBN: How accurate has Veribanc been in predicting the record number of bank failures of late?
HELLER: More than 99 percent of all bank failures have received one of our lower ratings, i.e. less than our highest rating of Green with Three Stars. Since 2007, there have been 184 bank and thrift failures; 174 received one of our lowest three ratings. Throughout our entire 30-year history, the only banks we have “missed” – assigned our highest rating – have had an element of fraud involved at the bank. These cases of fraud have been well publicized.
Since 2000, we have had three different insurance companies audit and approve our rating methodology.
PBN: Why is Veribanc located in Woonsocket, as opposed to a financial center such as New York City?
HELLER: We are a niche company that is highly automated. Proximity to the large financial centers has no bearing on our research, performance, products or purpose.
PBN: Has this been a good time – a lucrative time – to do what you do? Has it been stressful to stay on top of developments in the financial markets?
HELLER: We saw a dramatic increase in our business from the summer of 2008 through the spring of 2009. We attribute this to the concern over the megabanks failing, the failure of IndyMac Bank FSB and the acquisition – failure – of Washington Mutual by JP Morgan Chase.
With more than 180 bank and thrift failures since 2007, people seem to be desensitized to the current downturn in the banking industry. Any business with a line of credit, or any consumer with a home equity line of credit should check the safety and soundness of their institution on a quarterly basis. If their bank fails, their previously negotiated terms and rates no longer apply. They will be subject to a new institution’s underwriting review. The new institution will have more onerous requirements, terms and rates. Prudent money managers use our rating system on a quarterly basis. This frequency of review provides ample time to react should your bank’s health start to fail.
