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Opinions and views from expert CFOZone members.
Tag >> lending
It's probably safe to say that we're all a little ticked about how long the financial regulatory reform process is taking. And Blackstone Group chief executive Stephen Schwarzman is right there with us.
But it's not so much because he's eager for fundamental change, though he admits change is needed across the financial landscape, not just banks.
Rather, the private equity magnate is worried that all this dilly-dallying is keeping banks from moving forward and lending.
Banks have been between a proverbial rock and a hard place when it comes to small business lending. The Obama administration is telling them to step up loans. But the message from regulators is tread carefully and look out for risk. Since many small businesses, especially in this economy, are in a precarious state, what's a lender to do?
Now, it looks like the Federal Reserve, along with a bunch of regulatory agencies, are finally trying to untangle these messages. A recent statement from various financial regulators and the Conference of State Bank Supervisors told bankers that it's okay to loosen the rules somewhat and that, in fact, they should start revving up their small business lending. The easing of standards is welcome, though as Matt Quinn points out, small businesses' difficulty may have more to do with demand than financing.
In its January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices released Monday, the Federal Reserve determined that the 78 respondents generally ceased tightening standards on many loan types in the fourth quarter, but have yet to unwind the considerable tightening that has occurred over the past two years. You can read the full results here.
As it often does in the survey, the Fed included some special questions for respondents. One area the central bank tried to dig into in its latest questionnaire was small business lending.
Despite their many protestations that their balance sheets are strong and that they are open for business, bankers just aren't lending like they used to, even to companies with strong credit. Instead, businesses are increasingly finding their financing in the debt markets.
For the first time on record, global corporate investment-grade bond issuance surpassed investment-grade corporate lending in 2009, the Wall Street Journal reported on Wednesday using data from Dealogic.
Excluding financials, lending to investment-grade companies was $1.2 trillion in 2009, compared to corporate investment-grade bond issuance of $1.4 trillion.
President Obama just met with bankers who received government largess through TARP, telling them, among other things, to start lending to small business. He's also proposed increasing Small Business Administration guarantees, waiving fees and other measures aimed at stepping up lending.
But, there's an urgent issue these steps don't address. Banks aren't lending, in part, because many small businesses simply are much worse credit risks at the moment than they were just a few years ago. It's the harsh truth: At many small companies, revenues have plummeted over the past year. And, those with assets, have seen that potential collateral depreciate dramatically, as well.
So far this has been Small Business Love Fest Week. It's certainly about time. But given how long it has taken for everyone's attention to get here, it feels like little more than damage control.
First, there was Goldman Sach's announcement that it was committing $500 million to small businesses. The move is being met with understandable derision and has the feeling of a PR move. Goldman even got the beloved Warren Buffett to lend his name to the initiative. The cynic in me also can't help but notice the program will help Goldman meet its requirements under the Community Reinvestment Act, which it is subject to now that it's a bank holding company.
You think the worst is behind banks? Financial institutions may not say so outwardly, but their numbers would beg to differ.
Let's face it, the U.S. is an economy built on credit, whether it be for consumers or for businesses. Banks know this. That's how they make their money. Or at least that's how they should be making their money.
And even though many banks are back to posting profits, it's not necessarily in ways that should make you feel good about the economic outlook. J.P. Morgan Chase has been killing it in investment banking and slogging through on the retail and consumer side. Wells Fargo beat earnings estimates, but nearly a third of its pretax quarterly profits came from its hedges on mortgage-servicing rights. Chase also had more than $400 million in net gains on its MSRs through hedges. Not exactly a sustainable revenue source.
But back to loans.
It's easy to forget about the little guy.
Given the tumult in the banking sector and the economy in general over the past year, it's almost understandable that small businesses haven't been everyone's biggest concern.
That seems to be changing now that banks -- while likely not out of out harm's way -- have stabilized and corporate earnings season is a bit less terrifying.
If you believe that small businesses are the heart and soul of the U.S. economy, well, I don't exactly know what to tell you.
The Small Business Administration, which ended its fiscal year on Wednesday, reported that it approved fewer than 45,000 loans in 2009, down 36 percent from last year, the Wall Street Journal reported Thursday. The dollar amount of those loans fell by almost 27 percent, to $9.3 billion over that time.
However, the year ended on a high note, with the dollar volume of approved loans in September reaching the highest level since August 2007 during the month. In the fourth quarter as a whole, more than 15,000 loans totaling $3.3 billion were approved, an 18 percent increase from a year earlier and almost back to quarterly levels seen in 2007.
If the specifics of the regulatory reform of the financial industry may still be a bit blurry, it seems to be a given that some financial institutions, especially banks, will be required to maintain higher capital ratios to curb risk.
But an increase in capital requirements for banks may not be so bad for the industry after all, according to a report published yesterday by the Pew's Financial Reform Project , which brings nonpartisan analysis on the financial industry to policy makers.