What needs to happen next?
Lending needs to pick up some steam. We’re starting to see, hear and feel that now. I was in two separate meetings with two local bank presidents in Cleveland this week and both told me that they have been loosening the purse straps a bit and have been funding more loans over the last two to three months. That will start improving their margins first and foremost, getting them back to more profitability. The regulators will feel better about that.
Hopefully the underwriting they are doing is sound so these loans won’t end up on a watch list. But there are fewer companies found creditworthy than there were a few years ago, so the banks are working harder to make sure the companies to which they’re making loans will be able to repay the loan. It is starting to happen.
On an investing end, that should improve interest rates for depositors to make people more interested in depositing money and committing it for some time period. That allows the asset liability matching that banks do to stabilize themselves.
What lessons can other industries learn from the challenges of the finance industry?
Be innovative but don’t go into things blindly. It didn’t make sense to me or to a lot of people when we received pieces of mail stating you could have a 1.2 percent mortgage for a period of 18 months and then it will reset. Many smart people and organizations went along with that just because it was available, like lemmings jumping off a cliff. Many bankers moved in the same direction offering these loans. It was very visible because lots of people touch banks.
Other industries can learn that if it looks, quacks and walks like a duck, it generally is a duck. Does having a duck make sense for your organization?
Don’t just do something because others in your industry are doing it. Some very well-run financial institutions got into this lending. The notion was that there will always be value in real estate. Then if someone has a problem, they’ll sell off the real estate and that’s that.
Well, banks are in the business of lending money, not owning and selling real estate. If there is a lesson to be learned here, it’s to truly make sure that industry trends aren’t something to blindly or hurriedly jump into because your neighbors in your industry are doing it and you want to keep up with the Joneses.
Kenneth M. Haffey, CPA, CVA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or [email protected].