One Block to Recovery: Banks Aren't Lending Much

By Charles R. T. Crumpley | THE JOURNAL RECORD, October 27, 1992 | Go to article overview

One Block to Recovery: Banks Aren't Lending Much


Charles R. T. Crumpley, THE JOURNAL RECORD


By Charles R.T. Crumpley

The Kansas City Star

KANSAS CITY, Mo. _ If only Abdul Ghafoor could convince a bank to give him a loan.

Ghafoor, who's president of a highch company named Hybrids International LTD in Olathe, Kan., figures his 38-employee company would be more muscular, busier, adding employees if he had a stronger financial foundation.

"But we are not able to grow just because of a lack of funds," said Ghafoor. "If we had proper funding, we could have had by now over 100 people employed."

Multiply Ghafoor's quandary by thousands and you might have the answer, or at least one answer, as to why this recovery continues sputtering: Banks simply aren't lending much.

In fact, as of the end of August, banks had more money in U.S. Treasury securities than they did in loans to businesses _ the first time that's happened, said Christopher Low, an economist with HSBC Group PLC in New York.

It wasn't supposed to be this way. In a mighty effort to prod along this pokey donkey of an economy, the Federal Reserve Board cut interest rates 22 times in the last three years. Many interest rates are now as low as they've been since John F. Kennedy was president.

But the low interest rates never prompted much borrowing.

"It's just a heck of a lot safer (for bankers) to be in the securities market rather than being out there looking at marginal loans," said Jim Maag, executive vice president of the Kansas Bankers Association.

Bankers aren't making many loans, he said, mainly because they feel chilled, thanks to the wave of stringent new regulations that have washed over them since the savings and loan industry went kerplunk.

"They're thinking, `Wow, what regulation am I violating by making this loan? What happens when the examiners come in and look at the collateral on this?'

"We have kind of a catch-22 situation in that you have people in Washington from the president on down saying that banks really need to get out there and do more lending," said Maag. And the other side of that coin is that the regulators are saying, `Don't you dare make a bad loan.' "

The result: Bankers say they're not at all reluctant to lend to blue chip, wellllateralized companies. But while many say they want to, they admit they are reluctant to lend to small, entrepreneurial companies _ the kind that have the capability of growing fast or bombing just as fast.

Jim Weidman, a spokesman for the National Federation of Independent Business, a group that represents small businesses, said that growing companies with about 20 to 50 employees are squealing loudest for funding.

"That's where there seems to be the greatest amount of demand, and those are the ones that are really hurting," he said.

He said bankers are "gun shy" in such areas as Texas and Florida, where S Ls created a financial black hole.

"Sometimes they want loans to be double collateralized. Small businesses can't come up with that," said Weidman.

"If you're going to ask banks to finance the comeback of the economy, we're going to be dealing with a lot of marginal borrowers at high risk," said Chris Rieck, a spokesman for the American Bankers Association in Washington. "The Congress of the United States is insistent that it wants to take as much risk out of loans as it can."

Back in the 1980s, Congress and regulators adopted a policy of "forbearance" in an attempt to let faltering savings and loan associations grow their way out of their problems.

Unfortunately, it only gave more time to let the honest but troubled S Ls sink deeper and let the looters steal more until the problem grew unimaginably immense. …

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