Bank Lending will Improve Slowly

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If you’re looking for working capital for your small business, don’t count on getting it from your local banker anytime soon, says a leading economist. Martin Regalia, chief economist for the U.S. Chamber of Commerce, told a gathering of business executives at Dealer Expo that it will take about a year for banks to return to “normal lending practices.”

Speaking at the annual meeting of the Motorcycle Industry Council (MIC), Regalia said that it will take time for banks to define the risks — financial and regulatory — before they feel comfortable lending again.

“The biggest factor in getting banks lending again is time,” Regalia said. “Banks are in it to make money like everybody else, and contrary to what the president says, you cannot run a free enterprise system without risk.

“Risk is what we all take. It’s what we all manage, and it’s why we make the money we do. Without risk, there is no return — nobody pays you for certainty. So banks are in it to manage risk. As time goes on a little bit, they will get a better feel for that risk, and they will begin to lend, and they will probably, at some point down the road, overshoot again and under price and over lend to the risk. But that takes time.”

Administration activities are increasing the risk, as bankers see it, and only causing them to hold back, Regalia said. “The administration is increasing the price of risk to a greater extent than should be done,” he says.

“When [the administration] comes out and says they’re going to tax the banking system, to take $90 billion out of the banking system in a responsibility tax, well let me see … the only people who are going to lose in that bank tax are the people who are borrowing from the banks. And that’s going to delay the time that the banks are going to feel comfortable lending again.”

And, continued Regalia, when the administration tells banks there will be new regulations on what businesses they can and can’t be in, it adds more uncertainty to the equation. “Those types of practices create uncertainty in the banking system, and that uncertainty delays the time the banks are going to feel comfortable, and there’s no way around that.”

Some would call on the government to force banks to make more loans, Regalia said, but that’s been tried before, and it doesn’t work. “We tried to force them to lend money to people who couldn’t pay it back, and that wasn’t a real good thing to do.”

Regalia isn’t like your typical economist; he uses charts, but he spices up his comments with stories and delightful quotes.

So how long will it take? “I think it will take six months or so, and we’ll gradually, over the course of the next six months, see more and more in the way of lending. And then in the six months after that, you’re going to see the banks gradually return to their more normal lending approaches. But right now, they’re scared of running short of liquidity, there’s a lot of uncertainty they’re facing in what kind of taxes they’re going to be paying, what kind of restrictions they’re going to be operating under.

“It’s kind of like the guy who explained to me how to play golf: ‘Marty, just try not to hit two bad shots in a row, and you’ll get around the course.’

“And that’s what the bankers are trying to do: They’ve hit a really lousy shot, and they are trying not to hit the second one in a row. And they are going to be somewhat more circumspect in their lending right now than they would have been two or three years ago. It’s just going to take time to get back.” — Joe Delmont