Home About Archives RSS Feed

The Independent Investor: Why Banks Won't Lend

Bill Schmick

Then we'd own those banks of marble,
With a guard at every door;
And we'd share those vaults of silver,
That we have sweated for

"Banks are made of Marble" by Pete Seeger

Over the last few years, the Federal Reserve has practically given money away to any entity that calls itself a bank. Individual states are also trying, but so far the banks have just been hoarding this growing pile of cash instead of loaning it out. Why?

Two reasons come to mind: Banks are afraid of taking on lending risk. Burnt by the subprime mortgage debacle, they are now overly cautious on who they lend to in an economic recovery they are not sure is here to stay. Two, interest rates are at historical lows. If rates start to rise, loans made today could turn to losses fairly quickly.

Recently, state Treasurer Steven Grossman of Massachusetts announced a plan to give banks $100 million to deposit into local community banks for the express purpose of lending to small businesses. The money is part of a statewide effort called the Small Business Banking Partnership. The announcement has been met with some resistance within the banking community. Bankers claim it's not needed because small businesses aren't interested in borrowing due to the poor economy.

That's bad news because small businesses employ the vast majority of workers in this country and pay the most taxes. They are the backbone of this country's economy. Over the last year, small business lending has become a political football since the establishment of the $1.5 billion State Small Business Credit Initiative by the Obama Administration. The plan calls for the banking community to pony up $10 in new loans for every $1 of loans by the state government. Since then, banks and their lobbyists have gone out of their way to show how much lending they are doing to small businesses.

For example, in Massachusetts, as in other states, community banks account for as much as 80 percent of small business lending and that trend has increased through the recession, according to the state's banking association. They claim the amount of lending has also almost doubled in the last six years.

What they don't mention is a lot of that recent growth was in picking up old loans that out of state and money center banks had dumped or would not renew due to the recession and heightened credit risk. A recent survey of members of the International Franchise Association contradicts some of the data coming out of the financial lending sector. The survey revealed that 39 percent of the franchisors report that more than half of their franchisees and prospects are unable to obtain needed financing, which is up 33 percent from a survey taken last year.

"There are several businessmen right here in the county who want to open franchises with me but can't get loans from local banks," says a successful fast-food chain entrepreneur in Berkshire County. "The banks sent them packing to the SBA for help."

The bankers' argument that businesses are not growing and aren't applying for new loans is disputed by the small-business owners I talk to.

"What they aren't telling you is the hoops a small-business owner has to jump through in order to get that new loan," says the head of a large excavating company in the region.

"They want collateral and a lot of it. They want you to sign your life away, and none of that matters unless you are making tons of income as well. And once I pass all their risk criteria, I get the privilege of borrowing short term from them at 8-9 percent when the prime rate is 3.25 percent."

Given that most banks are paying under 1 percent for money to loan, one would think that a 7-8 percent spread should bring in plenty of profits. That is one of the main reasons that the Federal Reserve has been keeping interest rates at historical lows for so long. So far it hasn’t worked.

And speaking of the Fed and the end of QE II in June, most everyone (including the banks), are expecting interest rates to rise in the second half of this year. Few bankers have the appetite to lend money to a small business when they expect rates to rise. And if they do, they only want to lend for a short period of time.

"That's also difficult for a small business to handle," explains the excavator, "if I have to go back to the bank in three years, I can't do long range planning. I can't even be sure I'll get a new loan and if so, at what price. It makes being a small business owner that much more uncertain."

Grossman plans to come to Pittsfield sometime in May to discuss the state's funding initiative with local bankers. I think it would be a good idea to meet with small-business owners as well. That way he would be able to hear their side of the story before leaving town.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

Tags: banks, QEII, franchise, lending      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Pittsfield Super Details Emergency Communication with Families
Weekend Outlook: Bazaars, First Friday and Day of the Dead
Are your heirs ready to receive an inheritance?
Berkshire Organizations Awarded Food Security Infrastructure Grants
MCLA Announces the MountainOne Fund
Greylock Federal Promotes Assistant Vice President, Market Manager
Greylock School Project Moves Into Detailed Design Stage
MCLA Awaits for News on Donor Gift
Lanesborough Select Board Decreases Bailey Road Speed Limit
Pittsfield Licensing Board Says Bar Responded Properly to Melee
 
 


Categories:
@theMarket (506)
Independent Investor (452)
Retired Investor (214)
Archives:
October 2024 (9)
September 2024 (7)
August 2024 (9)
July 2024 (8)
June 2024 (7)
May 2024 (10)
April 2024 (6)
March 2024 (7)
February 2024 (8)
January 2024 (8)
December 2023 (9)
November 2023 (5)
Tags:
Election Commodities Europe Rally Euro Markets Selloff Crisis Energy Interest Rates Bailout Recession Stimulus President Oil Debt Ceiling Jobs Debt Greece Metals Stock Market Japan Deficit Retirement Congress Economy Pullback Stocks Unemployment Currency Banks Fiscal Cliff Federal Reserve Qeii Taxes
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
The Retired Investor: Betting on Elections Comes of Age
@theMarket: Election Unknowns Keep Markets on Edge
The Retired Investor: Natural Diamonds Take Back Seat to Lab-Grown Stones
@theMarket: As Election Approaches, Markets' Volatility Should Increase
The Retired Investor: Politics and Crypto, the New Bedfellows
@theMarket: Stocks Make Record Highs Despite a Wall of Worry
The Retired Investor: Back to the Future in Nuclear Energy
@theMarket: A Week to Remember
The Retired Investor: Economic Storm Clouds Could Be Just Around the Corner
@theMarket: China Stimulus Boosts World Markets