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.
Fact is Wisconsin banks didn’t cause the current recession, continue to be financially strong and have money to lend to qualified borrowers.
But the media too often confuses Main Street depository banks that are insured by the Federal Deposit Insurance Corporation (FDIC) with non-bank subprime lenders and Wall Street investment banks. As a result, many in the public 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, the recession.
The overwhelming majority of Wisconsin banks never made a single subprime loan during the housing boom. There are many reasons why, 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 accountholders 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 8 percent in the third quarter of 2008, the most recent figures available, and the consolidated loan-to-deposit ratio in Wisconsin is 112 percent. That means the average bank in Wisconsin is lending $1.12 for every dollar received on deposit.
Bank deposits also increased four 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.
Many in Congress are critical of banks for not lending enough to stimulate the economy, especially institutions that sold preferred shares to the U.S. Treasury. The numbers cited above prove that Wisconsin banks are lending, but they are doing so prudently. Banks didn’t make the risky 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 will to lend, but fewer businesses are qualifying for credit because of impaired cash flow and devalued collateral.
Kurt Bauer is president and chief executive officer of the Wisconsin Bankers Association, the state’s largest financial industry trade association, representing 300 commercial banks and savings institutions, their nearly 2,300 branch offices and 28,000 employees.