Bankers’ Hours column: bank due diligence makes loans harder to get
OK, it’s time to get practical. We’ve posed, predicted, and presumed a lot in this space over the past few months. We live in a real world and it’s time to come back to it. Even though most of us don’t understand it, and some, like Yours Truly, have no idea.
So what about banking and more importantly what does this mean for borrowers? During the last financial crisis in 2008, the flash point occurred in September, and within 30 days, major financial institutions and entities collapsed, including some of the world’s largest money pipes. : Fannie Mae and Freddie Mac.
Then, by the end of the year, individual banks, from tiny to titanic, were falling like villains in a Bond movie, with the carnage not fading until three years later.
It’s not like that this time, at least not yet. There is a good chance that the banking sector will not look like the post-nuclear economic landscape of 2009. The causes of the two events obviously differ, and are obvious to all of us, so we will refrain from entering most of them. them because we are talking about banking and should stay on topic.
That’s not to say that there won’t be stressful quarters for banks in 2021, and it could be worse for the big ones than the small ones, as mega-money centers lend to all segments of the economy. , and the butterfly effect guarantees trauma for all, even for businesses that are not on the front line, such as travel, accommodation and restaurants.
Some big differences until then:
During the last financial crisis, a large part of the assets backed by bank loans were blatantly inflated, including residential mortgages and mortgage-backed securities made up of these credits. This time around, some durable assets, including mortgages, hold value because the underlying collateral, the houses, does not yet fall in value. Until now, the law of supply and demand, always unchanging, maintains fairly stable real estate markets in general, and some are in fact booming, as evidenced by some seaside resorts, notably the ski resorts of the Colorado.
Another positive factor has been the bank’s profitability over the past eight years. As weaker operations collapsed on the trail of the Long March to Recovery, many survivors became very healthy and their capital accounts (net worth) flourished. They have the fiscal resources to respond to struggling assets. In the second quarter of this year, the Big Four U.S. banks set aside $ 33 billion in loan loss reserves in anticipation of borrower defaults, from businesses to consumers.
In the aftermath of the Great Recession, lawmakers and regulators have focused on measures to prevent future collapses, some effective, others less. However, one seems to work as intended: an annual “stress test” required for the country’s largest financial institutions. The program, launched in 2013, requires banks with asset sizes exceeding $ 100 billion (currently 32 in total) to examine their capital and reserves to determine whether they can survive a hypothetical economic disaster. Since this disaster is upon us, the most recent one conducted in June was significant. It was a sort of “This is not an exercise” exercise and, encouragingly, it all worked out, although some barely.
Finally, the latest financial crisis turned the surviving bankers into realists. Unlike half the country and many politicians, they are well outside the denial stage of pandemic shock. They know there are several shoes waiting to be dropped: the number of homeowners in mortgage forbearance programs has gone down, but there are still 3.9 million; the $ 1.2 trillion in loans to risky businesses, some of which are currently bankrupt, continue to weigh on the economy; and the subprime auto loan industry, with growing defaults before the pandemic, is not improving. These are just a few examples of shoes that touch the ground.
But the bank appears to be doing whatever it takes to reach the safe harbor of an immune planet.
All of this is good news for ultimate economic health, but not necessarily for borrowers on the ground looking for loans. The big banks have tightened underwriting guidelines on every lending compartment of the bank, from credit cards to large business loans. And it is not the marginal borrowers who are excluded. In some cases, a category of credit has been removed entirely by some banks, such as home equity loans. Often, large corporate borrowers cannot obtain the type of financing they are used to or the terms they expect.
All 32 operations in the stress test program tend to tread on the same beater as the heavy hands of the Federal Reserve and FDIC rest even more heavily on their shoulders. Small banks are just as cautious in loan selection, but they have the advantage of positioning themselves by being integrated into their respective markets, and therefore closer to the action. In short, a so-called community bank usually knows what’s going on on Main Street in a way that a TBTF (Too Big to Fail) institution never can.
So if your bank is one of the very big ones and the local branch manager doesn’t tell you anything about a loan application, it might not hurt to consult our (fictitious) hometown custodian. , The Second National Bank of Downriver, Montana.
Pat Dalrymple is originally from western Colorado and has spent over 50 years in the mortgage lending and banking business in the Roaring Fork Valley. He will be happy to answer your questions or hear your comments. His e-mail is [email protected].