Let banks do their job
President and CEO of the Colorado Bankers Association
Economic recovery begins with responsible access to credit. Banks know that businesses and consumers need credit, and that they aren’t always getting what they want. That leaves many asking why. Here’s why.
Despite the financial turmoil in 2008, banks in Colorado increased lending an amazing 11.7 percent, when most states and the U.S. declined. Colorado loans subsided approximately .8 percent in the 1st quarter 2009, and 5 percent in the 2nd quarter 2009 (two-fifths of which was from one of Colorado’s two bank failures).
In a nutshell, the lack of lending reflects low loan demand combined with four key variables that have created our current climate: borrowers’ creditworthiness, greatly diminished role of nonbank lenders, lenders’ financial constraints, and regulators’ increasing standards.
Bank lending plays a critical role in our economic recovery. Many are familiar with what borrowers, lenders and government are doing to address current financial issues. Bank regulation is a piece of the puzzle rarely discussed. The regulation and examination process directly affects a bank’s ability to offer loans. Regulatory oversight is a necessary and valuable asset for the financial stability of our country, but the Colorado Bankers Association believes bank regulators are currently impairing some responsible bank lending, and thus the recovery, by overly aggressive actions in three areas discussed below.
Borrower creditworthiness: Loan demand at banks is down across the board due to customer caution and economic uncertainty (except for home mortgages). Many borrowers’ financial statements deteriorated in the last year to a point where they do not qualify for loans now. Their assets are worth less and their income (capacity to repay loans) has declined.
Demise of nonbanks: Previously, borrowers might turn to nonbank lenders (unregulated or less-regulated private lenders) that had more liberal lending standards. However, many nonbank lenders have disappeared or tightened standards to look more like traditional prudent bank lending. Quick note:
• Bank: A financial institution that is heavily regulated and examined by government agencies, holding banks to standards that don’t apply to other lenders. Banks always have “bank” in their name and always are FDIC insured.
• Nonbank: A financial services provider not subject to banks’ heavy regulation – such as mortgage companies, securities firms, insurance companies, finance companies, Fannie Mae/Freddie Mac, secondary market, mutual funds …
The departure of nonbank lenders has had a larger impact than many would assume. Decades ago banks provided 70 percent of loans in the U.S.; bank lending has grown over the decades. The nonbank sector has grown even faster so that in recent years nonbanks provided 70 percent of U.S. credit and banks provided only 30 percent. The turmoil in the last third of 2008 eliminated many nonbank entities and severely damaged others. Borrowers have fewer options and customers (particularly commercial and commercial real estate customers) are more reliant now upon bank lending. In many refinancings, banks replace now nonexistent nonbank lending.
Lender constraints: As some borrowers have difficulty, loan losses inevitably grow for banks. Losses generally won’t affect a bank’s viability, but they do deplete bank capital which dictates a bank’s ability to lend. Regulators decide the amount of capital a bank must hold and it’s increasing significantly. That means less money can be loaned to borrowers.
Changing regulation standards: Despite borrowers’ and lenders’ constraints there are responsible loans that banks could make if they were permitted. Banking is a highly regulated business; examiners scrutinize lending practices and individual loans. Regulators have a valuable job to do: regulate and examine banks to assure their safety, and minimize the chance of bank failure. We think they should have a second objective: to foster bank lending to customers so long as done safely. Now the regulatory agencies focus on bank safety with no regard for credit availability in the community.
If banking was a lending machine, then Congress and the public have their foot on the accelerator – saying “go faster, lend more money.” But bank regulators have their foot on the brake – saying “no you don’t, we don’t want banks taking any risk.”
We think that the regulators’ single focus is damaging customers and the public.
Bank safety: Looking at the numbers, troubled banks are the exception, not the rule. On June 30, FDIC listed 416 troubled banks nationwide (5 percent of the 8,195 banks in the U.S.) which held $300B in assets (2.2 percent of the industry’s $13.3T assets). Comparatively, there were 1,496 on the list in 1990. Historically, 87 percent of those banks work their way back to health with extra attention – like a patient gets in a hospital.
Banks have better lending standards and thus fewer foreclosures. That means their loans are safer. Banks and affiliates account for 58 percent of residential mortgage lending, but only 18 percent of foreclosures in Colorado – banks try to make sure the borrower in fact can repay the loan. Conversely, nonbanks make 42 percent of mortgage loans, but have 82 percent of foreclosures.
The Colorado Bankers Association stresses prudent bank regulation. It is valuable and essential. When a bank’s focus is on complying with complex regulatory matters it can’t keep its first priority on serving customers and the community. That has consequences not only for banks but very importantly for bank customers and the entire economy that depends on bank lending now more than ever. Let banks do their job.
Don Childears is president and CEO of the Colorado Bankers Association.
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