While the most significant recession since the 1930's is yet to be totally quenched, I wonder if we may be seeing the banking industry sowing the seeds for the next downturn right now.
My premise focuses on the investor-owned commercial real estate marketplace. Community banks and regional banks have, for years, relied on the seemingly insatiable growth in that marketplace as the engine for the banking industry's growth. Strip shopping centers, multi-tenant office buildings, hotels and other properties were popping up everywhere, and banks were quite willing to facilitate the development with interim construction loans that later converted to limited maturity permanent loans. As long as the economy and secondary markets (both real estate and financial) were functioning rationally, all was well. However, as we all now know, things changed. The economy hit numerous roadblocks, construction demand plummeted, the financial markets collapsed, and banks found that the commercial real estate loans once considered rock-solid were instead faltering.
With that backdrop, regulators and bank boards responded as we would all expect - they restricted additional loans in the sector, regulators beefed up historical "guidance" to near the level of law, and suddenly the engine of growth for that sector of the industry was disabled.
As the economy moves from sputtering to modest growth, the expectation from banking industry shareholders is for a return to growth by community and regional banks. With investor owned commercial real estate no longer a viable option, those banks will be intensely focused on other avenues of growth. The small and mid-sized business community will be the target of many of those banks.
Bank management teams will assemble their bankers, describe the new post-crash banking paradigm, and implore each of them to immediately become business banking experts, go into the marketplace and sell loans and other services to the business banking marketplace.
If there were a reasonable balance between the supply of banking capital (and the willingness to deploy that capital) and demand from business, this scenario might well play out to the satisfaction of all.
However, demand for banking services by business remains very sluggish, while banks have unprecedented levels of liquidity on their balance sheets. Couple those circumstances with the deployment of large numbers of relatively unseasoned commercial bankers (who were great commercial real estate bankers, but who will be years in fully developing their commercial skills), plus the demands of bank management, boards and shareholders to resume growth, and the recipe for disaster is in-hand.
I expect the imbalance between the growth needs of the banking industry and sluggish demand for bank services to lead, over time, to downward pressure on loan structures, pricing, guaranties, covenants and the like to the extent that, given enough time, another crisis will have erupted.
My guess as to how long this will take? I'd estimate 2015 for the next crisis. I hope my thesis is proved wrong...
My premise focuses on the investor-owned commercial real estate marketplace. Community banks and regional banks have, for years, relied on the seemingly insatiable growth in that marketplace as the engine for the banking industry's growth. Strip shopping centers, multi-tenant office buildings, hotels and other properties were popping up everywhere, and banks were quite willing to facilitate the development with interim construction loans that later converted to limited maturity permanent loans. As long as the economy and secondary markets (both real estate and financial) were functioning rationally, all was well. However, as we all now know, things changed. The economy hit numerous roadblocks, construction demand plummeted, the financial markets collapsed, and banks found that the commercial real estate loans once considered rock-solid were instead faltering.
With that backdrop, regulators and bank boards responded as we would all expect - they restricted additional loans in the sector, regulators beefed up historical "guidance" to near the level of law, and suddenly the engine of growth for that sector of the industry was disabled.
As the economy moves from sputtering to modest growth, the expectation from banking industry shareholders is for a return to growth by community and regional banks. With investor owned commercial real estate no longer a viable option, those banks will be intensely focused on other avenues of growth. The small and mid-sized business community will be the target of many of those banks.
Bank management teams will assemble their bankers, describe the new post-crash banking paradigm, and implore each of them to immediately become business banking experts, go into the marketplace and sell loans and other services to the business banking marketplace.
If there were a reasonable balance between the supply of banking capital (and the willingness to deploy that capital) and demand from business, this scenario might well play out to the satisfaction of all.
However, demand for banking services by business remains very sluggish, while banks have unprecedented levels of liquidity on their balance sheets. Couple those circumstances with the deployment of large numbers of relatively unseasoned commercial bankers (who were great commercial real estate bankers, but who will be years in fully developing their commercial skills), plus the demands of bank management, boards and shareholders to resume growth, and the recipe for disaster is in-hand.
I expect the imbalance between the growth needs of the banking industry and sluggish demand for bank services to lead, over time, to downward pressure on loan structures, pricing, guaranties, covenants and the like to the extent that, given enough time, another crisis will have erupted.
My guess as to how long this will take? I'd estimate 2015 for the next crisis. I hope my thesis is proved wrong...
0 comments:
Post a Comment