Over the past five years, loans to businesses, big and small, tumbled. There were many events that caused the tightening of credit both globally and locally, but to understand where we are we must remember where we were.
To recap, during the Great Recession the banking industry purged itself of hundreds and hundreds of banks. These failed banks did not simply disappear, their assets, both good and bad, were often absorbed by stronger banks after the FDIC took over. While this process allowed the many banks to add branches and deposits, it also saddled them with a significant number of problem loans that they inherited from the failed banks. In order to deal with the mass of problem loans, many banks had to divert personnel and resources away from lending and other lines of business. In concert with the near collapse of the banking system, the stock market fell to record lows, unemployment skyrocketed, Europe wandered to the brink of its own financial collapse, and consumer confidence in the United States fell to historic lows. Not a great environment for economic growth. Faced with bank failures and myriad of other economic issues, regulators clamped down on all banks, pushing them to clean up their existing loan portfolios. These external and internal pressures helped to create a scarcity of desirable borrowers. In addition, the United States Treasury introduced the Troubled Assets Relief Program (TARP) to help alleviate some of the balance sheet pains financial institutions faced by introducing some liquidity. However, this caused many banks which utilized TARP funds, to sit on the sidelines and primarily focus on working on their balance sheets instead of pursuing lending opportunities. These issues and many others led the United States into one of the tightest credit markets in history.
When compared against much of the country, the Kansas City metropolitan area was able to make it through the past five years in relatively good shape. While the real estate market and employment figures took a turn for the worst, Kansas City still managed to avoid the utter disasters experienced in Arizona, California, Nevada and Florida. As Kansas Citians know, in Kansas City the highs are not as high and the lows are not as low.
Fast forward to the summer of 2012, much of the TARP money has been repaid, bank balance sheets are on the mend, consumer confidence has improved, unemployment rates have started to level off and the stock market has drastically improved. A lot of pundits think we should be further along in our recovery, but the truth of the matter is that the country simply got leveled by the Great Recession and is just now regaining its footing. Skittish consumers and investors are still leery of embracing the alleged economic recovery, especially when so many individuals are still out of work.
The Federal Reserve Bank of Kansas City has reported that Kansas City has experienced “steady or stronger loan demand, stable or improved loan quality and increased deposits.” Most other Federal Reserve Banks have reported either slight increases in loan demand or steady demand. U.S. Bank has reported that use of lines of credit by manufacturers has more than doubled. SNL Financial has reported that large banks in the U.S. (more than $20 billion in assets) had commercial lines of credit increase by 17% over the previous year while they also experienced a 13% increase in other commercial loans. The Mortgage Bankers Association has also released statistics suggesting that new commercial property loans have greatly increased over the past few years. These statistics seem to suggest that our economy could be headed in a positive direction and that the credit markets have started to loosen.
As banks hustle to appease their regulators, loans for businesses have become tougher to come by. New underwriting and collateral requirements resulting from the near collapse of the banking system have certainly made it difficult for businesses with less than stellar balance sheets. However, for those borrowers that were able weather the past few years, they are likely finding that all banks, including those that were once sitting on the lending sideline due to their efforts to clean up their balance sheets, have now jumped back into the lending market, offering favorable terms combined with very low interest rates in an effort to supplement their loan balances and create new interest income. This has led to an extremely competitive market for new loans as banks tussle over quality borrowers.