Banks in general are in better shape today than they were in the savings-and-loan crisis of 20 years ago, maintains Jon Chism.
Then why is it so hard for a business to get a bank loan?
It probably wouldn’t be so difficult if the bank regulators weren’t so rigid these days, suggests Chism, an audit partner at Plante & Moran in Grand Rapids who has been auditing banks “for about 35 years,” he said.
Banks today, according to Chism, are “much more sophisticated than 20 years ago when we had the savings-and-loan crisis.” Back then, some banks got into a bind from paying more in interest for the money they had on deposit than they were taking in from their loans.
Things were very different back in 1990.
“We used to go in once a year and help community banks figure out their allowances for their loan losses,” he said.
Now all banks are much more closely regulated and have to report quarterly on their precise loan conditions, and because of that, they are very sophisticated now in calculating their loan losses.
“The bar is much higher for all banks today than it used to be,” said Chism, even though they now have stronger capital reserves.
“Twenty years ago, the thrifts were allowed to have negative net worth and still keep their doors open. You can’t get close to that today,” he said.
Twenty years ago, Citibank was doing “migration analysis,” rating its loans and predicting what the losses would be on those loans, according to Chism. “The only people that were doing that were the very largest banks, and today, the regulators are telling the community banks they have to be doing it,” he said.
Another difference between then and now: Very few banks were using derivatives 20 years ago to lock in their profit margins.
Derivatives got a black eye in the recent financial crisis, “but in reality, derivatives play a significant role for all banks in managing their risk,” said Chism. Although community banks don’t trade derivatives, they do use them today to help manage their risk, he added.
Now strict regulation of the banks is an issue the industry must deal with “on a daily basis,” said Chism.
When a bank fails, he said, federal regulators do a “post mortem. They write reports, and the regulators (who were involved with the failed bank) always get a black eye.” That criticism makes the regulators “tougher on the next bank” they work with, said Chism. “They don’t want to be criticized.”
The trade in many questionable mortgages and the subsequent damage to the economy set the tone for banking regulation today, he said.
“I don’t think banks are pearly-white clean and that they didn’t do anything wrong,” said Chism. “Bankers have what I would call a herd mentality. When somebody gets into a business and it looks good, then they all get into it.”
Twenty years ago the regulators were more likely to give banks time to work out problem loans. For instance, banks were allowed to amortize losses on loans over five years. “Now they can’t do that,” he said; now banks have to take the entire loss at once, when it happens.
If the loss could be amortized over several years, it would have less of an impact on the bank’s capital reserve numbers required by the regulators.
A bank that gets into trouble has a difficult time raising capital because who wants to invest in a bank in trouble?
The government regulators have two options: One is to take over the bank and turn it over to another bank that isn’t in trouble. That’s what happened in Hastings in July when the MainStreet Savings Bank was taken over by the FDIC and suddenly sold to an out-of-state banking company.
A takeover by the government “costs the taxpayer money.” he said.
The other option is to give a troubled bank some time, said Chism.
“If a bank can survive” with help, “then to me, it makes sense to give them some time. Step back and look at the situation and determine if there is a business way to get through some of the rough times we’ve got right now.”
Even though bankers lack confidence these days, banks actually have a lot of cash right now because people are putting their money into them rather than in the stock market, “because there is so much uncertainty in the stock market right now,” he said.
“The reality is that everyone is afraid of (the economy) of Michigan, and they are afraid of banks in general. The combination isn’t very pretty” as far as helping organizations like Independent Bank in Ionia regain its strength, he said. Independent Bank has suffered severe losses lately and its stock in late July was hovering at around 30 cents a share.
There is so much cash doing nothing that interest paid on savings accounts now is at rock bottom, but the federal FDIC insurance assures many small depositors that at least their money won’t be lost.
“Just because (the banks) are not paying (much in interest), that doesn’t mean the banks are making a whole lot of money off it, either. We really need confidence in the market,” he said.
Chism said the bankers who are making commercial loans tell him they end up making only about one out of 10 that are possible, because they are worried about what they see on the loan applications.
In April, Art Johnson, chairman and CEO of United Bank in Grand Rapids and the current chairman of the American Bankers Association, said many commercial loans were no longer being renewed by the banks because of the drop in commercial real estate values and other asset values over the last four or five years. Many businesses’ collateral was severely diminished in the recession.
“Do we need the banks to be overseen? Absolutely,” said Chism, but he wonders if all the new rules spawned by the failures of the big investment banks are really necessary for the small banks.
He noted that some of the banks with the least amount of trouble during the financial crisis were locally owned community banks.
“They do a good job. They take care of their community — they don’t go off and get into wild and crazy schemes, if you will. And then they have to comply with regulations that are written to keep the bad guys at bay,” said Chism.