By Pete The Banker
President Obama has recently made an impassioned plea to Community Banks to increase their lending to help stimulate a national recovery.
In addition to this plea, Obama and Secretary Geithner have attempted to entice the small banks by promising an additional $30 Billion of TARP funds at a lower cost to those who participate and use the funds for commercial loans and commercial real estate lending. “”Small banks “have been very reluctant to come and do business with the government,” Geithner said earlier this month (HERE), in testimony before the Congressional Oversight Panel, a TARP watchdog. Geithner said banks see a “stigma” in dealing with the government, particularly while their regulators are paying close attention to underwriting standards and capital levels.””
But the President and Secretary of Treasury are meeting resistance to the pressure being applied (HERE).
Community Bankers are reluctant to deal with the Administration for a number of reasons which the Administration fails to articulate. Key among these is a fear of the government’s involvement in the operation of their business including both overly restrictive compensation requirements and overly lenient lending standards in accomplishing Administration’s goals. Community Bankers are reluctant to loan today because a number of financial concerns.
1) There is significant risk in lending today with the high unemployment level and number of industries struggling in this economy. Lending in a low rate environment (low cost of funds to the bank) even with additional low cost capital supplied by the federal government makes little sense if the loan principal is immediately in jeopardy. Today’ lending requires application of much higher credit standards in order to mitigate this risk of loss.2) Many Community Banks are presently preoccupied with repairing their balance sheets which have suffered from a failing economy and particularly from local construction and real estate loan problems.3) Regulators are actively pressuring Community banks and insisting that management focus on financial integrity, requiring them to build capital and loss reserves to the exclusion of conducting more normal business operations.4) There is less loan demand for small business and real estate loans in the present economic environment.
This reluctance of the small banks poses a significant problem for the Administration. Obama sees small business expansion as a crucial answer to the high unemployment that is hurting him politically and will likely impact next year’s Congressional elections.
Perhaps rather than trying to stimulate further ill advised lending, Obama should focus on improving the economy and lowering unemployment through infrastructure spending or stimulating the private sector with either tax cuts, rather than on his pet ideological initiatives. The true key to increasing loan demand is quite simply decreasing risk perception so the banks and investors will lend. An expanding economy when perceived financial returns exceed perceived financial risks will go a long way toward freeing up the flow or bank and investor funds for profitable, job creating projects. Coercing and bribing the banks with taxpayer dollars to lend in a high risk, high loss environment will not!
Tell ’em where you saw it. Http://www.victoriataft.com