New bank regs to tighten business spending
August 25, 2008
In response to the nations current economic woes, some business owners have been hit with the harsh reality of declined loans or sharply reduced credit. Yet many business owners arent taking the credit crunch seriously. They are seemingly telling their bankers, Whatever in a year or two, youll be throwing money at me again. In the past, perhaps that was true. But it might not be today.
Our new economic climate may be part of a trend, not a cycle. And with increasingly louder rumblings from Congress, the Treasury Department and some key regulatory agencies about revising our nations lending system, things may never go back to the way they were.In March, the Federal Reserve made a much-publicized bailout of the troubled investment bank Bear Stearns. The validity of the London InterBank Offered Rate (LIBOR), long among the most prominent benchmark interest rates, is being questioned. Investment markets and the dollar remain unstable, with some worried that bank failures an indicator of real financial turmoil could rise. Recently, the Federal Deposit Insurance Corporation (FDIC) closed a $2.1 billion bank in Arkansas, ANB Financial, for unsafe and unsound lending practices. Lax lending standards, especially on development and construction loans in Arkansas, Idaho, Utah and Wyoming, were the direct cause of the banks seizure.
Now, the Bush administration has proposed an overhaul of the U.S. banking system that would formalize the role of the Federal Reserve Bank, enhance federal regulation of lending and consolidate regulators. While this legislation is unlikely to make it through Congress until 2009, at the earliest, legislators of both political parties recognize the need for increased supervision of all banks.The overhaul proposal includes: The Federal Reserve would become the primary market regulator, with greatly expanded powers, formalizing its work to stabilize the markets over the past months. The new plan would have just one regulator, replacing at least five federal agencies and 50 state banking agencies that currently regulate banks and thrifts. A new agency would be created to protect consumers and investors. A new Mortgage Origination Commission would oversee the regulatory structure of the mortgage industry. Insurance companies would have the option of a national charter just as banks do. The Securities Exchange Commission (SEC) would merge with the Commodity Futures Trading Commission.The outcomes of such a restructuring would be many: Smaller banks, with lending policies more focused on collateral and less focused on cash flow, likely would be forced to reverse their priorities. Loans could be more difficult to obtain. Borrowers will need to demonstrate greater cash flow than in the past. In areas where speculative building has been a mainstay of the local economy like many of Colorados mountain resort communities those loans may be harder to get. There could be less difference in the way national banks and state banks are regulated. For property lending, allowed loan-to-value (LTV) may decrease. Credit may cost more because of increased regulatory expenses. The federal proposal is aimed at entities that can affect the entire banking system. That means the government is most concerned with the stability of the nations top banks. The largest 77 banks in the United States have $6.1 trillion in assets, about 64 percent of the entire $9.5 trillion held by all domestically chartered, federally insured commercial banks.
Businesses that are concerned about their future borrowing capacity can take specific actions to improve their lendability. Fortunately, these actions can also improve an organizations stability: Build the business over time. A businesss stability and longevity have huge impact on a loan decision. Improve earnings and cash flow. Automatically debit vendors when possible to ensure on-time payment. Minimize debt. The less leveraged your position, the greater your companys appeal for future financing needs. Sharpen your credit profile. Settle outstanding liens and judgments, and pay any back taxes due. Business owners and key executives need to improve their personal credit ratings. Enhance personal cash flow with income independent of your business. This will give you the ability to leave cash in your business, if necessary.In the future, expect tighter, more expensive credit. Banks at every level will likely be more stringent lenders. But in the long run, these changes will strengthen our economy and businesses that learn to thrive in this new environment.
Charlie Bantis is Senior Vice President and Senior Credit Officer for Vectra Bank Colorado in the Roaring Fork Valley, Montrose, Telluride and Steamboat Springs. He can be reached at (970) 544-2203 or email@example.com.Business Lounge is a feature of Inside Business, published Tuesdays in The Aspen Times. The Aspen Chamber Resort Association provided this column.