Disarray in banking system making it difficult to get a loan

Sylvia Porter

April 10, 1991|By Sylvia Porter | Sylvia Porter,1991 Los Angeles Times Syndicate

Other events have pushed it out of the headlines and the minds of most of us. Still, the disarray of the banking system is far from over.

It affects you. You are the lender of last resort who financed the bailout of the savings and loans. You will finance any other bailouts that may take place.

But it may influence you in another, more immediate way as well. As an individual or a small business owner, you may find it difficult or impossible to borrow money from a bank.

Despite all the talk of criminal wrongdoing by various banks and bankers (and it seems certain there was some), a much bigger portion of the losses experienced by lending institutions came from non-performing and negatively performing assets. This means loans that weren't repaid or that were backed by collateral lower in value than the outstanding portion of the loan.

Contrary to impressions you may have gathered from fictional melodramas over the years, banks do not like to foreclose. It's messy and expensive, and the likelihood of satisfying an outstanding debt is slight. This is true even in the case of non-performing loans. The lenders prefer -- or, at least, preferred -- to work with the borrower wherever possible, offering deferred payments, refinancing and so on.

In some cases, this was enough to see the lender through to happier days. In many cases, it was not. By the time banks were forced to foreclose, there wasn't much to foreclose upon, and the banks took losses.

The situation was made worse by continuing economic downturns in some regions of the country. Those slowdowns were magnified because people invested as though the boom of the 1980s would last forever. Home and other real estate prices would just go up and up! The economic expansion would continue!

All of this, then, led a lot of banks to the point where they owed depositors more than the bank's resources. A crisis was here. Federal regulators sharpened their pencils and moved in.

But now there is growing concern that the regulators may have been overzealous. Many of the bad loans were obvious, and it was not difficult for all involved to agree that something needed to be done: foreclose. Or, at least, cut losses by reducing additional credit to loanholders who weren't meeting their payments.

More problematic were loans that were being repaid on schedule -- but in situations or industries that looked as though they might be in trouble in the future.

Bankers dubbed these loans "performing non-performers." Businesses who were so labeled suddenly found lines of credit withdrawn, even though they had never missed a payment and were up to date.

Such businesses grew in number as the recession set in, according to banking officials. Where banks once were willing to ride out the storm (or at least a minor squall or two) with their customers, they were no longer willing to do so.

"The regulators would give banks no flexibility," says a congressional staffer looking into the problem. "Businesses found themselves being pre-emptively foreclosed upon. Some were forced out of business."

The Federal Deposit Insurance Corporation says that the problem, if it exists at all, is greatly exaggerated. Bankers disagree.

The message is clear, they say, even if it isn't stated in so many words: Be prepared to justify every penny you've loaned, and be prepared to take the heat for your misjudgment should loans prove to have been unwise.

Both the Senate and the House of Representatives are looking into the situation. They are discovering that the problem defies an easy solution, because everyone involved is doing his or her job. Business people are financing their operations by taking on debt, as they always have. Bankers are concerned about the performance of loans, as they must be. And banking regulators, wanting to forestall the necessity for another enormous bailout, are putting the heat on bankers to make sure their loans are good ones. The dilemma? It's not working.

With the economy still sluggish, the number of loans that have moved into the area where caution is necessary has increased.

It's a mess, and no one seems quite sure what to do about it.

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