Bankers Working to Ensure that Businesses Get Needed Credit

In recent testimony before the Senate Banking Committee, Art Johnson, ABA chairman and chairman and chief executive of United Bank of Michigan in Grand Rapids, said that despite the difficult economic climate bankers are working to ensure that the credit needs of their communities are met.

"Both banks and their regulators are understandably more cautious in today's environment," Johnson told the committee members. "But every bank in this country is working hard to ensure that our customers – particularly the small businesses that are our neighbors and the life blood of our communities – get the credit they deserve."

Johnson added that loan demand has fallen dramatically since the recession began, but that there are some positive signs of recovery beginning to emerge.

"We have heard from bankers that small businesses are returning to test the market for loans, even though they may not wish to borrow at the moment," he said. "It will take time for this renewed interest to be translated into new loans made, however."

With regard to commercial real estate lending, Johnson maintained that this sector will continue to pose problems for the banking industry throughout the year. The collapse of the secondary market for commercial mortgage backed securities and the economic slowdown has caused office and retail vacancies to rise dramatically. Increased vacancies have caused CRE "take-out" financing to become scarcer and increased the number of stressed loans on banks' books.

"Regulators will continue to be nervous about the trends in CRE lending and will continue to be critical of banks' CRE portfolios," said Johnson. "But examiners need to understand that not all concentrations are equal, and that setting arbitrary limits on CRE concentrations has the effect of cutting off credit to creditworthy borrowers, exactly at a time when Congress is trying to open up more credit."

Johnson also expressed appreciation for the White House's plan to increase capital for small banks who volunteer to use it to increase lending to small businesses. However, he noted that a key factor to this proposal is ensuring that it avoids any TARP-related stigma, suggesting that community banks would be disinclined to participate if subject to the rules and restrictions of TARP.

Finally, Johnson commended Congress' work to maintain the integrity of the Small Business Administration's 7(a) loan program. The temporary increase in 7(a) loan guarantees of up to 90 percent has been helpful as banks work to extend credit during the recession, Johnson said.

He also noted that the SBA's expansion of eligibility to small businesses in the 7(a) program, by applying the broader standard used for the 504 program, mean that "an additional 70,000 among the largest of our small businesses will be eligible to participate in the 7(a) program."