How are banks handling these new realities?
Another major reality is the pressures that lending institutions are facing to maintain credit quality. Banks are rewarded or punished both from regulators and the investment community based on the quality of their loan portfolios. Institutions that have high-quality loan portfolios — whose stock values have stayed up — are being asked by the FDIC to take over other institutions that are having trouble or in some cases have actually failed.
The attention and focus on loan quality is driving banks all across this sector to make sure that they make good decisions. These decisions go back to requesting client equity in transactions, dealing with quality tenants and borrowers, and getting more information.
The result is not unlike a grocery store suddenly changing its floor plan. You walk in the store and go to aisle six for chips and Coke, but you’re looking at laundry detergent. Now it takes you twice as long to figure out how to shop in your store because you don’t know where anything is.
That is one of the banking industry’s huge responsibilities. People are aware of the fact that the world has been turned upside down. Banks need to communicate the changes to the borrower. If people are looking to finance a project, the bank needs to tell them what is different and why it’s different.
How can you help your banker?
First, meet with your banker frequently. If there is a change out there that is impacting you, your banker needs to understand it, and vice versa.
The more timely information the bank has, the easier it is to make a quality decision. Robert E. Lee lost the battle of Gettysburg in part because he had no advanced knowledge of what was going on. While his chief scout, Jeb Stuart, was off trying to generate headlines for himself, Lee marched into that area not knowing about the amount of Northern armies gathering around him. History might have been radically different if he had that advance knowledge.
How do banks use that information?
Banking is an industry involved in risk. Banks can’t always make the risk disappear, but if they take no risks, they make no loans. So, banks have to take appropriate risks. Their goal is to truly understand what the risks are in your business. What about your business makes you wake up at 3 a.m. in a cold sweat? If it makes you nervous, it should make your bank nervous. Your bank can’t make the risk go away, but if it understands what the risk is and how to measure it, it’s in a better position to react.
Tom Cargo is the senior vice president of commercial real estate at FirstMerit Bank. Reach him at [email protected] or (330) 384-7527.