Virginia Banks Keep on Lending

Clearly this is an extraordinary time for the U.S. economy. The Bear Stearns acquisition by JPMorgan Chase on March 16, 2008, launched a chain of more than 30 events that have had a dramatic effect on the economy and that included unprecedented gov ernment intervention. Twenty-seven key events occurred between Labor Day and November, with new headlines emerging every weekend in September. And it does not appear to be over yet.

This time of economic turmoil has placed the banking industry under the microscope as the general public struggles to find an explanation for how we got to this point. The answer is that what seemed to be a sudden crisis in 2008 was a result of years of higher-risk lending in the subprime mortgage area, fueled by a voracious appetite on Wall Street and around the world for securities backed by these high-risk loans. That worked as long as housing prices went up; it fell apart in dramatic fashion when the housing market turned down.

So how is Virginia's banking industry handling the economic uncertainties along with the increased scrutiny? Better than you might think.

Banks have been the backbone of the Virginia economy for more than 200 years. Through lending, banks have helped grow their communities and have helped people make their dreams come true, so they could do things like go to college, own a home, or start a business. As the 60,000 Virginians working for banks still do today, bankers have provided significant community leadership and volunteer service. What's more, despite the current economic situation, Virginia banks have remained safe and sound and continue to invest in the communities they serve. There are 141 banks operating in Virginia, the vast majority of which maintain the highest level of capital as defined by their regulators.

The introduction of the Capital Purchase Program (CPP) by the U.S. Treasury Department and the idea of the government owning senior preferred shares in U.S. banks has caused taxpayers to inquire about the necessity of the program and the use of the government funds in this manner. Media references to the program as a "bailout" of the banking industry have only added to the curiosity. The CPP is not an industry bailout, but rather an investment in already healthy banks. In fact, the program is a win-win-win: It is a good investment for taxpayers (a 5 percent return is hard to come by these days), good for the banking industry, and, most importantly, good for consumers and businesses as it helps with our economic recovery.

Although banks have been more cautious in their lending practices -- which is appropriate given our current economic challenges -- Virginia banks are continuing to lend to credit-worthy borrowers. FDIC data shows that Virginia bank lending has been on the rise, with business loans increasing by $1.8 billion during this recession. In fact, banks all over the United States have increased their lending during the recession, which is in contrast to the previous six recessions. According to The Federal Reserve, business lending has increased 12 percent and consumer loans have increased 9 percent. In the six previous recessions, business loans decreased by 0.7 percent and consumer loans decreased by 5.1 percent.

How can this be when we hear so much about the decline in lending? The answer is simple: While banks are expanding their lending, they cannot make up for the credit decline from the non-bank lenders outside of the banking industry, which in recent years have accounted for twice as much mortgage and consumer lending as banks. There is less credit available, especially for borrowers who represent a higher risk. But the oversimplified reporting we so often see in the national media might lead many qualified borrowers to conclude that no credit is attainable. This is simply not true.

Treasury Secretary Timothy Geithner recently announced guidelines for the second phase of TARP. The plan contemplates additional capital investment in healthy banks. It will also emphasize foreclosure mitigation programs and the purchase of toxic assets that continue to be a problem in the financial markets. While details on the plan are yet to emerge, it seems that Treasury's efforts are pointed in a good direction to help with our country's economic recovery.

In the meantime, the best thing consumers and business owners can do during this tough economic period is to talk with their bankers. Remember that the fundamental business of banking is to take deposits and make loans; that is how banks operate and that is what bankers want to do.

Bruce T. Whitehurst is president and CEO of the Virginia Bankers Association.

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