Someone once said lending is part art and part science.
Certainly commercial lending employs its fair share of science
in the form of analytics, metrics, statistics and more. My days in Psych 101, however, remind me that
human application of any science adds variability,
hence the artistry.
Now that we are two-plus years into the Great
Recession and emotional reaction has been replaced
with rational thinking, commercial bankers and business
owners can start to understand what caused the
current economic state and assess whether it is normal.
Plenty has been written in the last year regarding the
causes, but not as much has been stated about the normalcy
of the present business environment. Severity
and speed of onset vary, but the answer to the question,
"Is this normal?" is "yes."
Some recent reading started to blur the lines
between art and science and a corollary emerged between the
stages of business lending, as seen by the banker and business
owner, and the stages of grief. In that context, grief is not a negative
reaction, but a normal response to experiences.
There are parallels between the five stages of grieving identified
by Elizabeth Kubler-Ross and the stages of business lending.
The stages of grief in business are related to loss, which can
be loss of customers, earnings or an entire business for an entrepreneur
or loss of a loan for a banker.
Initially, denial is the dominant reaction, temporary as it is.
Both the entrepreneur and banker rationalize that everything is
fine, which rather rapidly is replaced by a heightened awareness
of the situation.
In the last 18 months, most commercial bankers and some
business owners certainly have experienced that reaction.
Denial likely is the most detrimental stage of grief for business,
as early detection and action is the strongest defense.
Delayed reaction results in anger, which in the Kubler-Ross
model is the second stage. Thoughts surface, such as "Why is
this occurring?" Bankers examine underwriting standards, looking
for oversights, and business owners look to shift responsibility.
Once the inevitable is realized, the bargaining stage is
reached. Bankers assess the adequacy of collateral and
the likelihood that the business will survive or resurrect
itself, while the business owner uses negotiating tactics
to keep the banker "in the game." That phase sometimes
is a delay tactic, with the expectation or hope that the
situation will get better if there is just a little more time
to manage through the crises.
The subsequent stage, which in the Kubler-Ross
model is depression, may be considered depression in
the lending scenario, but also could be the opposite —
jubilation — as the reality becomes apparent, positive
or negative. The certainty of the situation and whether
loss or no loss is the outcome starts to influence decision
Lastly, acceptance is realized. Bankers accept that
either no loss will result — obviously the preferable outcome -
or that it will. Business owners accept that either their business
- and, usually, their livelihood - will continue, or not, and
Economic theorists, notably these days Hyman Minsky and
Joseph Schumpeter, long have posed overlapping theories for
economic instabilities and their effect on bank loans in stages
that can be related loosely to the model I've outlined here. Even
Schumpeter acknowledges grieving, although that's more on the
part of the banker in that credit granting is essential to capitalism,
but it is the grantor who most likely grieves if a venture fails.
The lesson learned is that cycles or stages are normal within
the capitalist system, even to the present degree. For regular
economic activity to continue, financial institutions — particularly
community banks — must continue to foster the exchange
that facilitates commerce, job creation and recovery.