The American Bankers Association testified on Friday on the impact of the recession on lending to small businesses.

Testifying on behalf of ABA before the Senate Banking Committee, community banker Stephen Wilson, Chairman and CEO of LCNB National Bank in Lebanon, Ohio, said that this is not the first recession faced by the banking industry, and that despite the current challenges banks are working hard to ensure that the credit needs of their communities are met.

Wilson said that banks are continuing to lend but that it has become increasingly difficult for individuals and businesses to meet their financial obligations as the economy deteriorates.

“The recession is placing great stress on all businesses,” said Wilson. “The cumulative impact of six straight quarters of job losses is placing enormous financial stress on some individuals, and with jobs lost and work hours cut, it does not take long for the financial pressure to become overwhelming. This, in turn, has increased delinquencies at banks and resulted in losses.”

He said that consumers are saving more of their money. As they buy less, small businesses suffer and business bankruptcies increase. Both banks and their regulators are being more cautious in lending, and businesses are being more careful about borrowing.

“Against the backdrop of a very weak economy it is only reasonable and prudent that all businesses – including banks – exercise caution in taking on new financial obligations. Loan demand is down considerably and our expectation is that loan demand in this economy will continue to decline.” However, Wilson also said that lending volumes will rebound as business confidence continues to improve.

Finally, Wilson said that the changes in the regulatory environment would improve the situation for small business lending. He said that it is a natural tendency for bank regulators to intensify scrutiny during tough economic times, but also stressed that while too much risk is undesirable, a regulatory policy that discourages banks from making good loans has serious economic consequences.

Wilson said that banks are burdened by the high premiums paid to the FDIC and that it is critical to find the right balance when determining how and when these premiums are paid. He also said that well-intentioned efforts in other regulatory areas can have the unintended consequence of making things worse.

“What the regulators want for the industry is what the industry wants for itself: a strong and safe banking system,” he said. “To achieve that goal, we need to remember the vital role played by good lending in restoring economic growth and not allow a credit crunch to stifle economic recovery. We must work together to get through these difficult times.”



Source:
American Bankers Association