Archive for December, 2009

Lend, lend, lend…

Saturday, December 19th, 2009

President Obama and Fed Chairman Bernanke call for increased lending from all banks…  The fact is, demand for loans is decreasing for both qualified business and consumer borrowers. Calling out for banks to lend more is akin to pushing on a string… The real question is who is willing to make loans to those that are in need? The largest national banks are using the wide spread in the yield curve that Fed Policy has created to make tremendous returns without having to take any risk in making loans. They borrow at near zero to buy long dated Government backed securities and make a guaranteed spread. On the other hand, community banks like our own North Jersey Community Bank have actually benefitted by taking a larger slice from this shrinking pie of lending… Community banks are currently the only segment of the industry that has actually increased lending, especially to small business.  50% of loans made to small business under $100,000 are made by Community Bankers, as well as 33% of small business loans under $1,000,000.

But as the Administration says lend, lend, & lend, the banking regulators are busy pushing banks to increase loan loss reserves, increase capital levels, increase classification of non-accrual loans, and have made any loan where a commercial building is involved a four letter word.  This pressure is precisely pro-cyclical, reducing capital which in turn reduces a bank’s ability to lend; remember for every $1 in capital a bank has, it can lend approximately $12 while maintaining an 8% capital ratio, a very conservative number. Banks are considered to be “Well Capitalized” when they have Tier One Risk Based capital of 6%, yet some banks are being pressured to operate at much higher levels of 8%, 10% or higher. 

This disconnect has to end. While I certainly understand the calls for additional lending, as well as the conservative stance being taking by regulators, if we hope to help small business in this country, all the interested parties need to get together and work toward a plan that will accomplish a unified goal. It is a known fact that 70% of new jobs are generally created by small businesses, and that the banks that best understand those businesses are Community Banks. Government should create programs that will provide loan guarantees, government debt subordination, tax free interest for community banks that lend, streamlined loan application process, and tax holidays for Community Banks that provide a certain level of increased lending…Regulators need to be a part of this process and create some temporary relief for paying & performing loans that may be stressed, capital requirements for well run institutions, and work in partnership with the Administration and the 8,000 Community Banks that are suffering from the macro effects of the irresponsibly that has produced this economic and financial mess.

Together, we can rebuild our economy and get back on track to create the much needed jobs that have been so elusive…