You Can't Have It Both Ways, Folks
What is a banker to do?
The regulators are saying: "Get your house in order. Write down even performing loans if the assets are worth substantially less than when the loan was originally made. And get your capital position up, even if it means negative growth."
But members of Congress, local lawmakers, and other public officials are saying: "Get out and lend. You bankers have caused the recession by your conservatism, so do something about it."
You're damned either way.
A CRA Dilemma
Take the Community Reinvestment Act. Bankers are being told to keep pushing minority loans. But restoring profitability requires them to limit themselves to larger credits - usually over $25,000 - and tighten credit standards. Unfortunately, minorities usually need smaller loans, and often their credit position is weaker than other borrowers'.
Another contradiction: Banks are being told they can take over others if they expand low-cost home loans - but they're also told to generate profits through tighter operating standards.
"Make up your mind!" bankers scream.
Easing the Problem
There are ways to make these contradictions less difficult.
Bankers whose institutions have agreed to finance considerable housing for the poor say they've usually had ample time to evaluate the prospects, so they can pick and choose.
From the risk standpoint, they add, there is a big difference between having to put big sums into such credits immediately and having time to help the borrowers get their ducks in a row.
Also, a number of nonprofit organizations can help potential borrowers under a CRA program make their propositions more bankable. People at these organizations advise potential borrowers and actually go with them to the bank to help them put the best face forward.
Several groups do this in Newark, N.J., where I teach. One is the Coalition of Small Business Development, a one-man operation financed by the Metro Newark Chamber of Commerce, the Newark Economic Development Corp., and the city Development Department.
The one man is David Means, a black banker with 32 years of experience. He does everything from answering the phones to developing the loan package with prospective borrowers.
If they take Means' advice, their chances of getting the loan improve considerably. But his advice can be bad news.
First, he culls out ventures that appear to have little chance of success - like seasonal products or those with heavy competition.
Next, he cautions that capital needs will be larger than the applicant thinks, and that initial capital has to come from the applicant, friends, or relatives - the bank won't be the risk-taker.
Finally, he explains that working 20 years as a window installer, for example, does not make the applicant proficient at running a window installation business - unless there is also knowledge of marketing, bookkeeping, inventory control, and the like.
|Get Rid of Your Brother'
A David Means can help prevent the problems that have so often beset banks trying to do a good job in CRA-type lending.
"We tell the borrower not to be too quick to get grandiose ideas," he says.
He recalled an enterpreneur who started a restaurant in downtown Newark, in a minority area, and who was doing beautifully until taking in his brother. The brother "wanted to turn the place into a 21 Club," Means said.
When the salad rose from $3.95 to $8.75 and the customers disappeared, the owner came to Means for further advice.
"Get rid of your brother," he said.
No bank could do this without subjecting itself to being called a partner - and therefore susceptible to lender-liability suits if the business failed. But an organization such as this Newark coalition can do the dirty work that a banker knows must be done.
This does not mean the dilemma is over. "If the CRA were eliminated, many banks would quit making minority loans," David Means said. However, he added, "others would continue, under the feeling that their communities need the loans and careful efforts can make them bankable."
As John Reed said at a recent Japan Society meeting, though the CRA has not led to a rapid expansion of special loans, its requirements and tough regulatory enforcement has made banks more sensitive to community needs.
This, said the Citicorp chairman and CEO, has led to stronger efforts to go beyond the ordinary in carving out bankable credits.
Regulators Backing Off
Meanwhile, there is good news on the regulatory side.
On a recent trip to New England banking conferences, I was heartened to hear bankers say the examiners there are finally becoming scared by what their excessive severity is doing - not only to banks, but also to communities.
It seems that 1990 was the year of locking the barn door after the thrift horse had been stolen. Now, a number of bankers told me, examiners are becoming far more realistic, relaxing their previous severity in forcing banks to write off assets.
In the years ahead, it seems, regulators, examiners, and community leaders will better appreciate how important banks are to our local economies.
To regain such appreciation after years of being the butt of consumerist pressure would be a bright silver lining to the cloud of regulation.