Banking Law

What I'm hearing from community bankers and their legal counsel is echoed by the following comment of William Dunkelberg, the Chief Economist for the National Federation of Independent Business, when asked what the recently-passed federal plan to buy toxic loans and securities from financial institutions will do for small businesses.

"Probably nothing."

Dunkelberg, who also chairs Liberty Bell Bank in Cherry Hill, N.J., said the rescue plan wouldn???t affect his bank or most other community banks.

???I don???t have any toxic mortgages to sell,??? he said. ???We have money to lend.???

The general counsel for a trade association for community banks e-mailed me with even harsher words for the machinations in our nation's capital.

I keep hearing that the investment banks need access to the funding sources (deposits) that banks have.  Doesn???t that put more strain on the banking system and make one of those ???too big to fail??? banks a real toxic situation?  Meanwhile, it is the little guys that will get closed (since they only pose a systemic risk to their local communities) and pay higher premiums.

Yep, when the feds start fiddling, the law of unintended consequences unleashes its merry hand, which proceeds to bitch-slap the innocent wherever they stand (or squat, as the case may be). When you've allowed a crisis to brew until the eleventh hour and fifty-ninth minute, the seat-of-the-pants solutions you're forced to make often make things worse, don't they? Of course, the absolute worst solution would have been to have sat on the slapping hands and fiddled while the economy burned. At least, that's our story and we're sticking to it, notwithstanding bloviations to the contrary from wedge-cut coiffed management consultants and other assorted nay-sayers, and notwithstanding the additional fact that the stock market continues to tank even though the "bailout" legislation passed last week.

Another assertion of community bankers is that the "credit freeze" problem, which was the justification for the bailout, is overblown.

There is not even agreement on whether small businesses face a credit crunch.

A net 10 percent of NFIB members said loans were harder to get in August than three months earlier, but only 2 percent cited the cost and availability of credit as their No. 1 business problem ??? far below the 37 percent who cited credit as their biggest issue in 1982.

When the economy slows, businesses may have a harder time qualifying for loans because their sales and profits decline, Dunkelberg said. But uncertainty about the economy is decreasing small businesses??? demand for credit.

There is ???no sign of the seizing up of credit markets,??? Dunkelberg said.

The National Small Business Association found a different result when it surveyed its members in August.

Two-thirds of those business owners said they had been affected by the credit crunch, up from 55 percent in February. Nearly one-third said terms on their outstanding bank loans had become less favorable.

???Clearly the credit picture for small business isn???t great right now,??? said NSBA President Todd McCracken.

My limited experience (not long ago, another blogger who does not know me accused me of having known only one renter of a house in my entire life, and if a blogger makes the accusation, it must be true, right?) tells me that credit is tight for small businesses generally. Even if my experience is worthless, the fact that the big financial institutions are in the big freeze is the problem that poses "systemic risk" to the financial system. Whether or not Liberty Bell Bank has money to lend to the local used car dealer at the moment is not as critical to the long-term well-being of the economy as the fact that Wachovia's credit temperature is rapidly approaching absolute zero.

As many of us feared, stories are also surfacing that bank examiners may be starting to affect credit availability by creeping up behind bankers and peering over their shoulders.

Banks are concerned, however, that regulators will ???start second-guessing??? every loan decision, said Jim Chessen, chief economist for the American Bankers Association.

That is already happening in some cases, even at well-capitalized banks lending to ???good prospects,??? he said. ???That is having a chilling effect on the willingness of banks to lend to even the best borrowers.???

We understand that examiners are concerned about deteriorating underwriting and servicing standards and collateral values, as well as about the health of commercial borrowers, in the current unsettled economic climate. However, community bankers also have a legitimate concern that the screws not be tightened too severely. That wouln't be good for either the banks, their borrowers, or the economy at large. Let's hope that all sides use prudent restraint. Given our experience with the last meltdown (one less severe than this one), we're not expecting miracles in that respect, but we can always hope for the best.