One thing upon which different bankers and consultants seem to agree is regulators are coming down harder on banks and are quicker to classify some banks as unsafe.

But there’s some dissent as to whether those fears are well-founded or not.

Kamal Mustafa believes they are. Mustafa is chairman of brand-new, New York-based consultancy Invictus, which analyzes bank health using a formula comparable to the government’s recent stress tests on bigger institutions. Mustafa’s business is founded on the idea that the worst-case scenarios built into the stress test are something that should concern smaller banks, too.

The common refrain in Massachusetts is that community bankers make sound loans, and have shored up more than enough capital to protect themselves against large-scale factors – like unemployment – that sour otherwise good assets. Broad-based safety metrics, like Tier 1 capital ratio levels, are at a healthy 9.4 median for the state as of last quarter.

But that number is now meaningless in the current environment, Mustafa says: “You can go from very well-capitalized, to not, very quickly. [Community banks] don’t even see it coming.”

Health Hazards

Mustafa ticks off the expected pitfalls: protracted, widespread unemployment, which will create wider levels of loan delinquencies as well as drain community banks’ deposits. Raising capital to combat that trend will be tougher because of illiquid money markets.

In addition, the market will recover long before the recession ends, meaning banks’ customers will take more cash out of savings accounts and put it back into the healthier stock market while delinquencies are still on the rise.

With that picture unfolding, community banks’ strong regulatory ratios could wither and languish with breathtaking speed – they might not want to admit it, but community banks’ assets could be more vulnerable than they expect. Unexpected hiccups could bring regulators down on banks quickly.

Mustafa says bankers need to be ready to defend their positions to a meaner FDIC, and that requires a thorough look at the banks’ assets, as well as incorporating lending and credit departments’ input into risk assessments for the bank’s future.

Local consultants are much less cautionary.

Matthew Pieniazek, president of Darling Consulting, said the FDIC’s safety metrics are indeed useful – they might be even more useful, he said, as they’re more carefully validated and scrutinized nowadays than in past years.

Community banks in Massachusetts have, by and large, shored up their capital levels in expectation of this kind of trouble, he said, and will likely remain strong through the recession.

But, Pieniazek acknowledged, banks shouldn’t get too comfortable. The commercial real estate market has seen some deterioration, and if that continues, commercial loans will start to drain capital reserves in large chunks, even in comparatively safe New England.

‘No Mistakes’

One other thing upon which he and Mustafa agree: banks have to be prepared for regulators who will apply a worst-case scenario to every asset, even those which might have only minor issues.

“We’ve heard that the message on high is that ‘We want no mistakes in the field.’ You put that message in the hands of an examiner in the field who has no upside in looking at gray areas … there is a clear bias with that message,” he said.

It sets off a bad chain reaction: regulators question more loans, and banks have to increase their loss provisions, and take write-downs that lower their capital ratios.

Lower ratios – such as a risk-based ratio below 10 percent – automatically classify banks as troubled, which means they face a number of adverse effects: they can’t participate in the broker deposit market; they face added restraints on what they can pay for deposits in their local markets; and they’ll likely develop a bad reputation in their communities.

In the long term, that can be more damaging to the bank than the assets would have been in the first place, he said.

But, Pieniazek said, banks are not asleep at the wheel: “I assure you, there aren’t any banks we know that are complacent … everybody is on high alert.”

Regardless, Robert Segal, CEO with Atlantic Capital Strategies, says more banks are responding to potential threats by taking a closer look at their own assets and future game plans.

But as to whether banks need to take the kind of aggressive action Mustafa recommends or not is a question of overall optimism or pessimism about the economy, he said.

“Predictions are fine, but some people are predicting the economy will recover, and some are saying that even though we seem to be stabilizing right now, we could be falling off again,” he said. “Everything hinges on the economy.”