This morning, the House Committee on Financial Services is holding a hearing exploring the balance between increasing credit availability and maintaining stringent lending standards.
Lately, a familiar mantra on Capitol Hill and in the media has been: "Banks must keep lending!" The conventional wisdom seems to be that all banks have stopped lending to the detriment of the overall economy in an attempt to stop their own internal hemorrhaging.
Banks and the credit they provide are undoubtedly the fuel of economic development. But it is a mistake to lump together all 8,000 banks operating in the United States and to assume that the actions taken by a few of our largest institutions are being repeated by community and regional banks.
Though it is very easy to use the nation's largest banks as a proxy for the condition or practices of the entire industry, we must remember the diverse nature of the U.S. financial industry. Banks in this nation come in all shapes and sizes and are specifically designed to serve a range of clients around the world, or just around the corner. So although some institutions that have been hardest hit by the recession may have reined in lending, an enormous amount of credit remains available to the public.
By and large, community and regional banks are continuing to rely upon sound lending practices to make credit available to qualified borrowers. This is what community and regional banks were doing before the recession, it is what they are currently doing in the midst of a recession, and it is what they will be doing after the recession. It is not surprising, then, that Federal Deposit Insurance Corp. Chairman Bair has specifically commended community banks for maintaining a flow of credit to consumers and for providing stability to the financial system throughout the current crisis.
Perhaps most important is the role of community and regional banks in providing credit to small businesses. Experts largely agree that small businesses are the engine of the U.S. economy. A community bank is often a small-business owner's first choice when he or she goes looking for a loan. By maintaining strong small-business loan portfolios and using prudent lending standards, community banks are enabling small businesses to survive the current poor economic conditions and will help pull the nation out of the recession.
Consumer confidence is another factor that cannot be underestimated or overlooked. Coordinated and effective supervision of community and regional banks ensured that the American public could be confident their local banks were operating safely and soundly. Even in Michigan, where the recession has placed tremendous strain upon local economies, community banks continue to make credit available for qualified consumers.
In 2008, the loan portfolios grew at nearly 60% of Michigan banks. For example, gross loans at Chemical Financial Corp.'s Chemical Bank in Midland, Mich., grew 6.5% last year. At Dart Bank in a small town near Lansing, gross loans grew 9%. Also, the chartering of new community banks demonstrates belief in both the inherent vitality of community banking and its fundamental necessity to community health.
Conversely, the size, complexity and scope of the nation's behemoth institutions restricted regulators' ability to fully determine the extent of the risks inherent in operating a money-center bank. The recession's impact upon these colossal banks has forced the administration, Congress and the federal regulator agencies to take extreme actions to prop up these institutions that are now — whether we like it or not — effectively "too big to fail."
Looking forward, I am confident the administration and Congress will prudently enhance our current regulatory system to ensure that institutions do not grow so complex that they cannot be effectively supervised. Meanwhile, however, we must ensure that our efforts to stabilize the nation's largest banks and to resuscitate the economy do not cause irreparable damage to the community and regional banks that enable our economy to survive market booms and busts.
Prescribing fixes to save the most crucial institutions to the detriment of community and regional banks that could otherwise survive is reckless and irresponsible. It is largely the diversity of our financial system that has prevented a complete shutdown of our economy and kept credit available.
The banking industry should not be defined by the actions of a minority of institutions, no matter how large they may be. So although some banks have been forced to limit lending, consumers can rest assured that safe and sound banks have money to lend.
