Academic journal article ABA Banking Journal

Manage the Pendulum

Academic journal article ABA Banking Journal

Manage the Pendulum

Article excerpt

IF A SHIP SPRINGS A LEAK, IT'S A problem. If the passengers all run to one side thinking to save themselves, the ship will capsize. Now it's a disaster.

The same can happen in the current credit crunch without some quick action.

Most lenders today have not been through a down credit cycle before. Neither have most examiners. Add to that members of the media, few of whom have likely covered a credit crunch.

There are still some "gray heads" around, fortunately, who lived through the last crisis and can recall its lessons, which could help keep this cycle from escalating. They need to speak up now, because the current situation is very susceptible to fear and rumor.

There's no denying the financial services "ship" has leaks, and these shouldn't be underestimated. Patches have been put in place, but they won't stem the flow if the situation is made worse unnecessarily. One area of concern is examinations.

Examiners are in a tough spot. The last thing they want to happen is to have a bank fail on their watch, as bankers pointed out at a recent ABA meeting. While understandable, that sentiment can lead examiners to demand that performing loans be classified because they happen to fall in the increasingly broad category of commercial real estate. Anecdotal evidence indicates this is occurring, and ABA has already had conversations about it with regulatory leaders.

As in the 1980's ag crisis, and again in the last CRE downturn, examiner overreaction forces banks to stop lending for legitimate purposes. That accelerates the downward spiral of economic contraction. It also puts unnecessary stress on borrowers who could be helped through a rough patch with patience and accommodation, bankers observed. …

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