Resuming Aggressive Banking Could Revive Industry Woes

THE JOURNAL RECORD, December 5, 1992 | Go to article overview

Resuming Aggressive Banking Could Revive Industry Woes


In the closing days of his campaign for the presidency (e.g. East Lansing, Mich., Oct. 28, 1992) _ to the rousing applause of a partisan crowd _ Gov. Bill Clinton promised a banking system that would "once again stimulate small business."

Who could possibly be against such a positive concept? Why not let the banks provide fresh capital to the thousands of struggling enterprises across the county? What a bold shot of adrenalin this will be for the nation's anemic economy, and for preserving our shrinking job base. . .right?

Wrong. Don't believe it for an instant.

Are our banking memories so very short? Have we forgotten how the banking system has been so severely tested in recent years? What did so many aggressive bankers do wrong?

Answer: It's called capital lending, folks. That's right, as distinguished from commercial lending.

Hold it, you say. Why isn't a loan to a struggling business simply a much needed and timely infusion of cash? Who cares whether you call it capital lending or commercial lending?

Answer: The depositors care, and that's all of us who have checking and-or savings accounts, and-or pay taxes to a federal government that backs insured deposits.

You see, when a commercial bank makes a loan, it only earns interest, and, therefore, can ill-afford risks that could result in loss of principle. For such losses could conceivably impair depositors' funds, and this of course is precisely what has happened to numerous banks and even now still threatens the solvency of the Federal Deposit Insurance Corp., which is obliged to protect depositors up to $100,000 (Congress is considering a $30 billion line of credit to the FDIC, normally funded by member banks.)

But when a commercial bank makes a loan that is fraught with inordinate risk _ i.e., either unsecured by marketable collateral or not collectable from a certain flow of commercial funds in the ordinary course of business _ it has made what is called a capital loan, not a commercial loan, and no bank can afford to make such loans for long at a mere rate of interest. To be sure, such lending _ if it risks loss of principle _ is entitled to a share of profits instead, when and if there are any.

Aha! We have now come to the nub of the problem. Too many bankers simply failed to distinguish between capital lending and commercial lending in years past, and too many depositors' funds were placed in jeopardy.

The other way of saying the same thing _ the flip side _ is simply that too many small businesses needed partners, not creditors. Burdening small businesses with debt has forever proved to be a tragic mistake.

Realization of this fact is of course what gave rise to small business investment banking, some years ago. But, just like the commercial banks which indulged in capital lending, the profitability of Small Business Investment Companies (also politically conceived) was checkered, at best. …

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