Contrary to what you may have read, state banks are strong
By Kurt Bauer President and CEO of the Wisconsin Bankers Association
If you believe everything you read or hear from the national media about the economic crisis, you will be surprised by the following statement: Rumors of the banking industry’s demise have been greatly exaggerated.
The fact is, Wisconsin banks did not cause the current recession and have money to lend to qualified borrowers. Eighty percent are still profitable.
But the media too often confuse Main Street depository banks, which are insured by the Federal Deposit Insurance Corp. (FDIC) with non-bank subprime lenders and Wall Street investment banks.
As a result, many people wrongly believe that it was FDIC-insured banks that made the risky mortgage loans that were the root cause of the housing market collapse and ultimately, this recession.
The overwhelming majority of Wisconsin banks never made a single subprime loan during the housing boom. There are many reasons for this, including that it is simply bad business for a bank to lend money to a borrower who doesn’t have the capacity to repay it. Another reason is that banks are highly regulated financial institutions that are subject to regular in-bank examinations.
By contrast, the non-bank mortgage brokers, who originated the bulk of the subprime loans in Wisconsin and nationwide, are not examined by their licensing authority and face only token penalties for compliance violations compared to bank regulatory standards.
But despite a lending culture that is best described as conservative and boring, many Wisconsin banks have been impacted by the economic downturn, which is reflected in declining bank earnings and the write-down of nonperforming loans.
To put the industry’s earnings decline into perspective, consider that most people’s 401(k) retirement accounts have lost value in recent months, but that isn’t because account holders made risky investments; it’s because stock prices are reflecting the slowdown in the nation’s economy.
Financial institutions are in a similar situation because the fortunes of banks and the economy are tied together.
Even with the severe economic turmoil, Wisconsin banks continue to outperform their peers nationally in many key categories, including profitability, capitalization and lending.
In fact, total loans by Wisconsin banks rose 5.7 percent in the fourth quarter of 2008, the most recent figures available, and the consolidated loan-to-deposit ratio in Wisconsin is 108 percent, compared to a national ratio of 85 percent. That means the average bank in Wisconsin is lending $1.08 for every dollar received on deposit.
Bank deposits also increased 4.2 percent during the same period last year, most likely because investors have fled more volatile investments in favor of safe and secure FDIC-insured instruments that offer a fixed rate of return. Nationally, bank deposits rose 3.5 percent, a 10-year high.
The numbers cited prove that Wisconsin banks are lending, yet some in Congress and elsewhere claim banks aren’t doing enough to stimulate the economy.
But, banks didn’t make the imprudent loans during the lending boom, and it is irrational to think they would now, especially with bank regulators demanding intensified due diligence of existing and potential commercial borrowers.
In other words, banks have the money and the will to lend, but fewer businesses are qualifying for credit because of impaired cash flow and devalued collateral.
Other obstacles that keep banks from lending more are beyond the banks’ control. Examples include the skyrocketing cost of federal deposit insurance, mark-to-market accounting, and recent state business tax increases.
