The Health of the Industry - Diagnosis and Prognosis
Baker, L. M., Jr., Journal of Commercial Lending
It is fitting for Robert Morris Associates to be leading the charge in a renewed drive for excellence in the management of credit quality. The organization has long called for high standards of lending behavior. More bankers should have listened.
THREE AREAS OF
I will discuss problems in lending and the prognosis for improvement. In doing so, I will touch on these three areas:
1. The general environment in which we will operate in this decade and the powerful forces affecting performance.
2. Continuing problems that have brought us to the current crisis of confidence.
3. The prognosis or probable outlook for bank lending in the future.
The Environment of the 1990s
When searching for answers, it is a mistake to discount the challenges facing us. In the years ahead, all banks will be tested by moderating economic growth and their own ability to adapt to a deregulated and increasingly competitive marketplace.
The early years of this decade will subsequently be viewed as a period of transition. A basic disinflationary shift is taking place in the U.S. economy, and the expansive debt growth cycle has come to an end. The implications are significant, sometimes painful, but in the longer term, beneficial.
The transition is from the inflation-assisted, debt-oriented growth economy of the 1960s, 1970s, and 1980s to fundamentally lower U.S. GNP growth. GNP growth in the seven years from 1983 through 1989 was 3.8% outstripping world growth for the period. The consensus for GNP growth in the U.S. in the decade of the '90s is about 2%, or roughly one-half of that enjoyed in recent years. Global growth in this same period is expected to be 3.8% raising the long-term rate of world economic growth and surpassing that expected in the United States.
This moderation in growth produces a painful awakening for individuals, corporations, governments, and banks that have not adjusted to future streams of revenue. Too often the revenues reflected in their budgets still reflect a speculative and inflationary bias left from previous decades and easier times.
The early years of the '90s will be marked by uncomfortable adjustment and uncertainty. It will be a period of great and profound challenge for American business and for those of us in banking.
In the years immediately ahead, excessive and imprudent levels of debt will be worrisome to corporations and government. Banks and other financial institutions will struggle to resolve problem loans while facing the additional challenge of finding profitable new loans to achieve growth in moderating economy.
There is too much available real estate, and the surplus will drag down the economy through much of the decade. A secular shift has occurred from high inflation and a federal tax policy that encouraged real estate development regardless of real demand. Of all new bank loans in recent years, 37% have financed real estate. Stimulus from this sector is now gone.
The problems of banks will be aggravated by serious, long-term adjustment in the entire service sector of the economy. The '80s will be remembered as a period of rapid expansion and inflation in the service industry. As a result, there is a glut of capacity in real estate, insurance, law, accounting, retailing, and financial service.
In addition, white collar productivity is soaring, and office jobs are steadily disappearing. A payoff has finally come from technology and the rapid diffusion of computer power. In 1980, 1 million people in the U.S. used computers. In 1990, 50 million people in the U.S. had access to them. With the practical introduction of this powerful tool, a flood of service productivity has been released. Look for continuing significant and permanent job losses in this area.
Demographic forces are less stimulative. …