President Barack Obama is on the verge of creating as much as $300 billion in credit for small businesses as bankers raise doubt about whether there’s demand for new loans and how much will be repaid.As a business banker, I can tell you loan demand is off from 2007 levels. In an economy that's well off from peak levels in 2007 there’s less demand for financing because there’s truly less growth to finance. It's really that simple.
Most of the new loan requests I get are those seeking to move away from banks that are reducing lines of credit or restructuring loan terms, and that's just replacing an old bank with a new bank on the same debt. Outside of that, the second largest part of demand is from those who truly lack creditworthiness struggling to stay in business. There's very little new creditworthy business right now.
The U.S. Senate may vote this week on a bill to funnel $30 billion of capital to community banks, whose business customers typically are small firms. Banks could leverage the sum to make $300 billion in loans that create jobs, according to a Senate summary. That could more than double the commercial and industrial loans at eligible banks as of the first quarter, according to data compiled by KBW Inc.
This one irritates me the most. We want to add “leverage” to a fragile banking industry at a time when commercial real estate will continue lower in a sharp decline: Commercial Mortgage Backed Security Delinquency Rate Rising Fast. Small banks lend heavily on commercial real estate, so existing commercial real estate loans will further pressure small bank balance sheets. The question really has to be: Is this new money being disguised for lending just capital to repair small banks?
Bankers say the problem isn’t scarce credit, it’s lack of demand from creditworthy firms in a weak economy. The result may be more loans given to distressed firms and higher losses. While bank regulators don’t compile default rates, the biggest lenders have charge-offs of 4 percent to 14 percent tied to small businesses. Eliot Stark, managing director at Capital Insight Partners Inc., said their credit record resembles “junk.”
Creditworthy firms is the key. There’s been a sharp decline in collateral values for the small business, whether it's the business assets or personal assets of a business owner. There’s simply less collateral to justify a business loan, thus fewer creditworthy borrowers. This is why banks are cutting back lines of credit or restructuring loan terms. I see it all the time. Even Bernanke contradicted himself recently and said the same thing: Banker's Corner: Bernanke Says, "Creditworthy Small Businesses Can't Get Loans"
Bank of America Corp., the biggest U.S. lender, is trying to “make every good loan we can,” said David Darnell, president of global commercial banking, in a June 3 statement. “Our clients are telling us that until they see sales pick up, they are reluctant to hire and invest.”
Wells Fargo & Co., which says it’s the biggest small- business lender, is “sitting here with tons of liquidity and we’re marching double time in search of more loans,” Chief Executive Officer John Stumpf said in an interview. “In most cases when I hear stories about small businesses not getting loans, it’s the case that more credit will not help them. They need more equity, they need more profitability.”
Obama and his followers are simply not listening to the industry. Two of the largest banks are saying the same thing: Clients don’t need more money.
Other gauges show higher defaults, with the SBA reporting a 6.8 percent rate this year on its main “7(a)” loan program through May, higher than junk bonds. Defaults on U.S. corporate speculative-grade debt since 1981 averaged 4.5 percent, according to Standard & Poor’s.
The government has turned the SBA lending program into the business lending version of Freddie and Fannie. Loan defaults in this arena will be high for several years.
More than 240 banks have failed since the start of 2009 as consumers and businesses fell behind on loans. Most of the failures were community lenders.
Again, Obama wants to add leverage into a fragile community bank segment. Maybe it’s not to lend but to clean up balance sheets under the disguise of lending.
“We can create lots of jobs making bad loans,” NFIB chief economist William Dunkelberg said. “We did that during the housing bubble.”
That last quote almost sounds a little sarcastic, I can't tell. The reason it worked in the bubble is because the economy was already trending higher, and more and more credit was desired as people kept up with the Jones fueling the bubble. It won't work in this environment because people don't see the need for more debt.
And that’s where the rubber meets the road, why would anyone even the President want to make bad loans, for any reason. Obama has it totally wrong again. You don't create sound economies by lending to less creditworthy borrowers. What is it about the recent past has he not learned via Fannie and Freddie? Obama is stuck on the idea banking/lending creates economic growth. Its bad policy in the long run and the President fails to understand sound economic policies. It’s a stupid plan.
Hope all is well.
J.D. Rosendahl, Rosey