Industry Review-Banks Risk/Reward Not There
Posted by Bill McDermott on Fri, Dec 30, 2011 @ 08:44 AM
Bank critics claim that banks are being too tight fisted with their funds and not lending them out to small businesses. Banks say that because of low interest rates, they are not being adequately compensated for the risk they take. The fight goes on and the disenchantment grows on both sides. Here’s what going on in the industry so you can understand why banks aren’t lending and you can’t get the financing you need to run your business.
The New York Times recently did an article stating that banks are flooded with cash. The reason for that is the financial markets have concerned investors greatly and they have pulled money out of investments to place it in bank deposits.
Banks have dropped interest rates about as low as they can to the dismay of depositors. However, the supply of money exceeds the demand for it. Historically, banks have been able to loan those deposits out and make money on the spread (the lending rate minus the deposit rate). However, the pace of lending activity can’t keep up with the inflow of deposits.
What’s more, the profitability of each new loan has shrunk. The Federal Reserve effectively sets the floor off which banks price their lending rates, its decision to lower interest rates to near zero means the banks earn less money on the deposits they lend out.
Bankers state they would like to make more loans so that they could earn more money. But there are too few of what they call “quality borrowers,” whose credit record, income and assets suggest they would reliably pay the bank back. The return the bank makes doesn’t justify the risk. In addition, since the return the bank makes is lower, that means the risk has to be lower also.
Some banks have resorted to fees on deposit accounts, debit cards and are pushing treasury management service fees to offset what they don’t make in the lending arena.
This is not an attempt to rationalize bank behavior, just to explain it. The solution for you as the business owner is to find a bank that is of sufficient size to spread these costs out over a large client base and has the capital and deposit base to lend to you despite these factors. It’s also important to you that you have the attributes of what one banker describes as a “quality borrower” mentioned above.
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