A Look at Lending

Feb. 2, 2011 

“Banks aren’t lending!” We have all seen the national media headlines and political rhetoric. Let’s examine the facts.

Banks have two sources of income. They earn interest on loans and investments—usually government debt at the federal, state and local levels. The other source is from fees charged for services rendered, such as overdraft protection programs, loan processing fees, safe deposit box rental fees and trust fees.

A bank’s two largest expenses are interest expense on savings accounts and certificates of deposit, and employee salaries and benefits. Additionally, in the past two years, the cost of covering loan losses has skyrocketed and, for most banks, has become a much larger expense.

So in order for banks to make money, they have to make loans. However banks are being more careful in the selection of loans. Interest rates on government debt are historically low, thus providing very low profit margins for banks.

Several factors are at play in banks’ analysis of loans. First, bank examiners from both federal and state agencies have been heavily criticized by Congress and the media for allowing banks to make riskier loans. Consequently examiners are in turn being very critical of bank loan portfolios. This scrutiny causes banks to be more selective about the new loans that they make.

Second, since the economy has been weak the past few years, prudent businesspeople have pulled back on growth projects, therefore diminishing loan demand significantly. Bankers are just now beginning to see some increase in demand for new business loans. Let’s hope that this trend continues, which should usher in new jobs.

A third factor is that collateral values have decreased in the past few years, resulting in shrunken net worth. Banks simply cannot lend as much today on a building or land as they could a few years ago. Some struggling companies and industries have had a hard time recovering.

Every banker I have spoken to is looking for good loans. Bankers not only want to lend, they have to lend in order to make a profit and remain in business. Banks are lending!

– S. Joe DeHaven

One Response to A Look at Lending

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