Zions Bancorp Stress Test Failure Shines Light on Bigger Problem

2 min read • Apr 01, 2014 • Ty Kiisel

This article was originally published on DeseretNews.com.

The last few days have likely been pretty tough for Scott Anderson and his team of executives at Zions Bancorp. I’m sure none of them like being identified as the only major U.S. financial institution to fail the Federal Reserve’s annual stress test.

Every year, the Federal Reserve looks at 30 different financial institutions with $50 billion in assets to ascertain how well they’d perform in a simulated economic downturn. “The annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions,” said Federal Reserve governor Daniel K. Tarullo.

I wonder if Zions Bancorp’s failure to pass the stress test should be looked at from a different perspective — shining a light on what I’m convinced is an even bigger problem. When addressing the failure, Zions Bancorp Director of Investor Relations James Abbot suggested the reason the bank failed the test is because roughly 20 percent of its portfolio includes real estate-backed small business loans.

Recently identified as one of the top lenders for Main Street by CNBC, I’m questioning the methodology of a stress test that penalizes Zions Bank for making what would, in any other circumstance, be considered very conservative small business loans backed by real estate. Because small business is unquestionably the biggest collective job creator in the United States, I fear financial institutions like Zions Bank might be tempted to opt out of small business lending to avoid the potential embarrassment of failing the stress test next year — making it even more difficult for small business owners to access the capital they need to grow, hire and stimulate local communities.

Lest readers assume otherwise, small business loans collateralized with real estate are considered a good investment by most lending institutions — provided we don’t experience another collapse in real estate values precipitated by anything like the mortgage and loan crisis that kicked off the Great Recession. In an economy that desperately needs to encourage job creation, discouraging one of the nation’s biggest small business lenders (making very safe and conservative small business loans) is not the way to do it.

“The composition of our company being a small business lender with real estate collateral had an adverse impact on us relative to other banks that have more residential mortgage exposure or more large-business exposure,” said Abbot as he suggested the bank is already taking measures to reduce the risks associated with its small business loan exposure. I hope Zions can do it without reducing access to capital to small business owners that would otherwise have been considered good loan prospects at the bank six or 12 months ago.

In fairness to the Federal Reserve, part of its job is to make sure the banks we trust with our deposits are safe, secure and will be able to weather almost any storm. I just question a methodology that identifies what has traditionally been one of the safest collaterals in the world as high risk. Shareholders and depositors who don’t read further than a headline that identifies Zions Bancorp as the only major financial institution to fail the Federal Reserve’s stress test will certainly have a more negative (and in my opinion, undeserved) opinion of the bank.

I would like to see the Federal Reserve do more to encourage banks like Zions to make capital available to small business. I’m afraid the way they conduct the stress test does just the opposite.


Ty Kiisel

Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.