Commentary: Banking industry standing strongIn December, President Obama urged leaders of the nation’s largest banks to find creative ways to free up lending. The messaging was interesting. First, he blamed the bankers for causing the financial crisis by lending too much, and then he blamed them again for causing high joblessness by lending too little.
By Joe Witt, president/CEO of the Minnesota Bankers Association
In December, President Obama urged leaders of the nation’s largest banks to find creative ways to free up lending. The messaging was interesting. First, he blamed the bankers for causing the financial crisis by lending too much, and then he blamed them again for causing high joblessness by lending too little.
Is it true that banks are not lending? Have the local banks made a decision not to make loans to qualified borrowers?
It is certainly not true in Minnesota. Here in Minnesota, FDIC data shows that bank lending has increased six of the past seven quarters. Even though we are in the midst of a recession, bank lending has held strong. Despite that fact, there continues to be some great misconceptions about lending.
First, let’s define just who is a bank and who is not. While traditional, FDIC-insured banks have been lending, overall lending from all sources is down. Thirty years ago, banks provided about 60 percent of all lending, but today, traditional banks provide less than 30 percent. It is the non-bank lenders that have all but disappeared. Two years ago, everyone wanted to be a bank. If you saw an advertisement for a lender, it was more likely to be an advertisement for an insurance company, a mortgage company or an investment brokerage house than for a traditional bank. That situation is not happening anymore.
Second, consider the elementary principle of “supply and demand” in today’s lending market. Banks have been experiencing a decrease in loan demand from qualified commercial borrowers. Previous recessions have shown that it typically takes 13 months after the recession for business confidence to return and credit to return to pre-recession levels.
In a recent survey by the National Federation of Independent Businesses (NFIB), only 10 percent of small-business owners reported problems obtaining financing. The government’s own data tells the same story. Banks have approved, but businesses have chosen not to utilize, $6 trillion worth of lines of credit. Small-business owners are reportedly more concerned about other issues, namely the uncertainty around when the taxes will arrive to pay for Washington’s spending binge, how much health-care reform will cost, and the impact of cap-and-trade legislation.
For banks to drastically increase lending there needs to be an adequate amount of qualified demand. Banks do not turn down loan applications because they do not want to lend. Lending is what banks do! Lending is how banks make money. Imploring a bank to lend more money is a bit like urging Best Buy to sell more electronics. If they could, they would.
It should also be understood that traditional banks find themselves caught in the middle of a battle between conflicting government objectives. It is difficult to respond to the calls of Congress to increase lending to stimulate the economy, while dealing with increased scrutiny from bank regulators.
Balancing lending with regulation is like driving a car. Congress and the Treasury want to go faster with their foot on the gas, while bank regulators want a foot riding the brake. Here we have two distinctly different messages. These mixed messages are akin to having one parent tell you that your curfew is 10 p.m., while the other parent allows you to come sneaking in at 2 in the morning. Public officials want stronger government regulation, yet they also want banks to open up the vaults and lend more. Regulators are asking more questions of the banks they examine, and in turn bankers are asking more questions of their borrowers. The banks are doing their best to balance these conflicting directives.
Our banks are seeing real challenges in this tough economy. Even in the midst of this recession, Minnesota’s traditional banks stand ready to help drive the local economy by making good loans to qualified borrowers.