A friend asked me recently whether my bank was still lending. Certainly the role bank lending plays in our overall economy and the importance of a stable banking system have been magnified in the past two years as the economy has worsened and the recession has deepened.
It is interesting to note the recent stress on our banking system started nearly 100 years during the Panic of 1907, a U.S. financial crisis prompted by a recession, a declining stock market and a failed attempt to corner the stock of the United Copper Co. When customers rushed to banks to withdraw funds and some banks didn't have enough cash on hand to satisfy all of their customers, panic ensued and several banks failed.
An effort led by J. P. Morgan ultimately stabilized the banking system and, after creating a National Monetary System in 1908, Congress created the Federal Reserve System in 1913.
Looking further back in history, perhaps the earliest example of a financial crisis is the Dutch tulip craze of the 1630s, when the price of some tulip bulbs approached the price of a home before the bubble burst and prices for the bulbs returned to those of other plants.
Government intervention in financial crises can be traced to the early 1700s when Great Britain stepped in to stabilize the market after owners of the South Sea Co. sold all of their personal holdings in that company, causing prices to plummet.
The worst global depression of the 20th century had its roots in the stock market crash of 1929, when the market eventually fell 89 percent from its prior high following a large increase in stock prices during the Roaring 1920s.
While few would compare the current recession with the Great Depression, the economic turmoil experienced in the past two years represents the greatest challenge to our banking system since that time. Although the government and Federal Reserve implemented many measures to stabilize our banking system and encourage banks to increase lending to individuals and businesses - including the well-intended but often disparaged TARP program - there remains a great deal of attention and debate surrounding the issue of bank lending.
When viewed from a national perspective, it is evident many lenders reduced their focus on new loan originations to concentrate on capital preservation and asset quality issues. Given that most of the readers of this publication live, work and play in Western and Central New York, it's worthwhile to examine the lending activity of banks headquartered here.
- There are 27 commercial banks based in Western and Central New York (defined here as west of I-81). Total assets at those banks range from $14 million to $64 billion.
- For the 12 months ending Dec. 31, 2008, the region's banks reported a weighted average increase in outstanding loans of 4.6 percent, compared to GDP growth of 1.1 percent for the same period. Only three banks reported decreases in loans for the year, and 13 of the 27 banks reported loan growth of more than 10 percent.
- For the 12 months ending March 31, the weighted average increase in loans at those banks was 0.7 percent, while GDP decreased as the recession deepened. For that period, six banks reported decreases in loans and 11 banks reported loan growth of more than 10 percent.
Why has lending at local banks increased and outpaced national economic activity during the most severe economic downturn since the Great Depression?
First, most banks based in our area did not deviate from their traditional underwriting standards during the years preceding the current recession. The local lenders are invested in the communities they serve, they know their customers and they focus on a borrower's ability to repay as well as the collateral or guarantees available to repay the loan in the event of a default. As a result, most local lenders did not originate or purchase sub-prime mortgages and have not had to expend a lot of time and energy selling or writing down such assets.
The real estate market in our area never experienced the large escalations in value that other areas of the country did. When the housing bubble burst and real estate prices plummeted in Florida, Arizona, Nevada and Georgia, the impact on prices in our market was far less pronounced.
Smaller community banks also have benefitted from the pull back of conduit and other non-bank lenders from the local marketplace, as some large national lenders either left our market altogether or returned to the underwriting standards community banks have employed for many years.
Our local economy is no longer tied to any particular industry or employer. While the jobs cuts at Kodak, Xerox and other manufacturers during the past three decades have been painful, the jobs remaining in the market are spread among a diverse group of manufacturers, service providers and educational institutions. I'm sure many bankers located near Detroit would welcome our slow growing but diverse employment base.
I do not mean to suggest that all is well in Upstate New York. The recession is real, unemployment is up and the cost of doing business here remains too high compared to other areas of the country.
Despite all of that, the answer to my friend's question is "Yes. My bank is still lending, other banks are still lending and the economy is starting to show some signs of recovery."
Gary Babbitt is Executive Vice President, Commercial Services. Gary can be reached at (585) 419-0670 ext: 50645 or via email at email@example.com
Reprinted with permission of The Daily Record ©2009