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Posted: October 01, 2009

On Management: The banks need to get back in play!

They're supposed to lend money, right?

Pat Wiesner

Two men I know well own a business in a small mountain town. They have been there a number of years and have been good for the area, bringing business and pretty good success to themselves. They employ a dozen or so people and are active around the community. The business owns a few buildings.

Three years ago, the owners decided to put up another building. The bank they had been dealing with for four or five years said, "Let us finance it for you. You're a good customer, you have cash in our bank and you can use the money for growth." For reasons of their own the owners decided to fund the building themselves, and the bank said, "OK, you are still a good customer; give us a chance next time."

Three months ago, the same owners said they now want to invest in some growth and asked the same bank to loan against the same building. They have a better balance sheet and income statement than three years ago; they have more cash in that bank than before. The bank said, "No, you are still a good customer, but the regulators will not let us touch a commercial real estate deal; give us a chance when things get better."

Shouldn't banks be helping us get out of this bad economy? Isn't loaning money the number one job of banks in any economy? I thought the bailout for banks was supposed to put them in a position to help the rest of the businesses in the country.

What do we have to do to put the considerable ability of our banking system up as a positive force rather than definitely negative? Can't we get regulators that can tell the difference between a company that is healthy and growing and one that is "toxic" instead of avoiding all commercial deals?

The banks got a bailout after causing a lot of their own problems. Then they became a problem for the rest of business by not making loans.
Right now banks are looking good because:

• They have gotten TARP (Troubled Asset Relief Program) money to clean up their books.
• They are still making money on their credit cards.
• They borrow money from the Fed for nearly nothing and buy 30-year Treasuries at 5 percent. A nice profit using our (taxpayers) money.
• They still have their "toxic" assets that have been written down, and they will provide a profit as time goes on.

So they don't have to lend money to be profitable.

But you and I and our small businesses have to find money to stay in business and to grow. As long as the banks are not in the game for us it will be a long recovery. The money available to us will probably be private. This is harder to get, more expensive, and there is less of it. And since economists say that small business will be responsible for 80 percent of the new jobs in our recovering economy ... jobs will be slower in coming.

Or we can convince the feds to change the rules for the banks. Don't let them borrow fed funds so cheap, make them have a reason to loan money for profit and change out the federal regulators that say no to everything.

There is precedent for this situation. Lessons we should have learned, for example, from the 1980s savings and loan crisis. Small business in the '80s had real problems getting any kind of loan other than to factor receivables. I know - I was there. The bank regulators had the same attitude, and it was a number of years before it got better and led to the really energetic growth of the '90s in the U.S.

Talk to the politicians you can influence. Let's learn something from history.

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Pat Wiesner is the retired CEO of WiesnerMedia, publisher of ColoradoBiz. He still leads sales training for the company. E-mail him at pwiesner@cobizmag.com.

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Readers Respond

Pat - I have a tremendous respect for your insight and commentary but I have to say you are WAY off base with regard to the overall tenor of your article. Once again, the entire banking industry is being painted with a twenty foot brush, and in many (most) cases, unjustifiably so. I have been in banking for twenty five years - I've been through the last wicked downturn in the late '80s and early '90's and have seen fortunes disappear and re-appear. I won't get into the issues about excess consumption relative to production etc. that has also been a contributor to the current situation. What I will do is explain the causes of some of the points in your article from a local banker's perspective. First - we WANT to be lending and making loans; it's what we do as bankers. Think about it, we earn income from interest charged on loans that are paid according to terms. If we aren't making loans, we aren't generating income. (And before you or your readers go off on fees - yes we charge for services but we are not a major national bank that controls credit card fees and rates and charges for using the teller line, etc - we're a Colorado bank that depends on our customers' good will for our existence.) Second - we are suffering losses in our portfolio just like everyone else. Not generally because we over-leveraged our customers but because the market devalued their assets and they now have no market for their product or service. We try very hard to work with our customers to avoid foreclosures - it's bad for everyone concerned - but we do have losses that have to be recovered. Third - Our regulators are changing the rules by which we operate. This is the big issue right now. It used to be that a bank was considered well capitalized when risk based capital was 10% of risk based assets (basically bank equity plus loss reserves divided by total loans). The rules have changed to where the MINIMUM adequate capitalization is now 13%. We've all passed basic math - when you have a ratio that you want to be bigger, you either a) increase the top number (in this case capital) or b) decrease the bottom number (in this case loan outstandings). Let's look at these in turn. We'd LOVE to raise capital in the market. We (along with the majority of our brethren) are a privately held bank with roughly 400 shareholders including employees. We chose NOT to access TARP because the conditions were so onerous, it was tantamount to granting ownership to the federal government (the terms were quite different for smaller banks vs the big national companies). So how to raise capital? First - maintain some level of earnings. We have done so despite the downturn because I believe we made good decisions and didn't over-leverage our customers. How about we sell more shares? But how do you attract investors - by paying a return. Here comes the fun part - the regulators say "No dividends without our approval". This pretty much eliminates our ability to raise capital as we can't define dividend levels or even if we can pay them if established. Now what? The only other way to increase that ratio by which we are measured is to reduce loan outstandings. How? By finding ways to move credits - good, bad or otherwise - off the books and by NOT adding new loans to the mix. It's not where we'd like to be but we have not been given a choice. For what it's worth, I'm the senior lender at my institution and have had the unenviable task of declining four loans in the last two weeks. All were requests from profitable companies with long track records, very good deposits (in aggregate, deposits would have covered about half of the loan amounts) and experienced management in markets where we compete very well. Why are they looking for financing? Because their banks are also trying to reduce balances to improve their ratio so the regulators won't further impair our ability to serve our customers and our communities. I guess I'd say in closing - make sure you have all the facts at hand before picking up that big brush. It's pretty indiscriminate in how it splashes paint, and can unfairly cover those that are undeserving of the criticism (most of the banks in this country, by numbers at least). Better to concentrate on the knee-jerk reaction of the regulatory agencies who got caught with their oversight pants around their ankles - just like the S&L mess in the late 80's. Caution - wet paint! By Anonymous Banker on 2009 10 21
After 20 years with Well Fargo and predicessors, it has taken me since Feb. 6th to arrange refinancing for my primary home. I have very good credit, and the amount I am financing is about 1/2 of the original amount. I will be looking for another bank, altho' I wonder if there is a good bank out there. Maybe the mattress is a good idea. By Mike on 2009 10 13
Amen to this article. My colleagues in the building industry have been being turned town time after time by their banks. Shame on these institutions for not helping those who have funded their books for decades. Perhaps we should play the same game - take our money out of our accounts and store it under our mattresses.... By Gayle on 2009 10 13
Pat, you are right on. I am an owner of a construction loan brokerage and servicing company, and our customers have been left for dead by the banks. Three years ago, we had 22 banks in three states that would fund our referred loans, and this week I was told by the last of them that they no longer want any business (loans) referred to them. We are shut down, as are our small builder customers that relied on that funding for so many years (which was profitable business to say the least). There are many good, long time local small businesses that are going down because of the attitude you so accurately describe. It is a sad state at best. By Jerry R. on 2009 10 13

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