Despite the national consensus that jump-starting bank lending is critical to getting the economy back on track, commercial and industrial lending remains mired at levels far below the targets set by government and the banks themselves – and getting the situation turned around might be much harder than most people think. The reason is that although the primary causes of the current depressed lending activity can undoubtedly be found in the real estate collapse, credit crisis and economic recession, there are also structural impediments within the banking industry that have to be overcome before lending can rise to desired levels.
New research by Greenwich Associates and FTRANS suggests that banks’ past over-reliance on real estate lending has left the industry structurally unprepared for a sudden shift into commercial and industrial (C&I) lending. In particular, two structural factors are hampering banks’ efforts to increase C&I lending: a shortage of experienced C&I bankers and outdated organisational frameworks that lack the strong central controls required the current market and regulatory environment. These factors help to explain why banks in past months have consistently fallen short of corporate lending targets set by their own management teams and regulators. Unfortunately for banks, companies and the economy as a whole, these structural issues will take time to address, and they will likely continue to impede efforts to speed the pace of C&I lending, even as the economic recovery progresses.
Missed Targets for Commercial and Industrial Lending
There is no doubt that US banks are working hard to remake portfolios still dominated by the commercial real estate loans made during the real estate boom. Eighty-six percent of the banks participating in the Greenwich Associates/FTRANS study said they are working to diversify their portfolios away from commercial real estate and toward higher levels of core C&I lending. In 2009, commercial real estate made up about half the portfolios of US banks, with C&I loans constituting 22.5%.
The banks forecast that in 2010, CRE would shrink to an average 45.8% of their overall portfolios, with C&I loans growing to 24.7%. Despite considerable prodding from regulators – and considerable support from government – banks have consistently fallen short of C&I lending goals. In fact, from 2008 to 2009 bank loan portfolios actually moved in the opposite direction, with C&I loans declining approximately 8.5% on average as a share of portfolios and CRE loans growing modestly.
To some extent, the uneven pace at which banks are increasing C&I lending activity is no surprise. Traditionally, banks have been slow – in many cases overly slow – to resume lending to companies in the early stages of an economic recovery. The severity of the current crisis, and its origins within the banking sector, has left banks understandably cautious. “At the same time, the depth and duration of the economic downturn has taken a serious toll on US companies, degrading the creditworthiness of potential borrowers at precisely the time banks have been forced to rein in balance sheets and tighten lending standards,” said Greenwich Associates consultant Ronald Balmer.
A Dearth of C&I Experience
The real estate boom that peaked in 2005 transformed the businesses of regional and community banks in the US and dominated the time and attention of US bankers. Many bankers in this country have been focused almost exclusively on real estate for a decade or more. As a result, they have little experience in C&I and other types of lending. Among bankers that do specialise in C&I, average tenure with their current banks is 15.7 years – a relatively high number for the industry, and one that suggests an aging workforce that will soon begin to see large numbers of experienced bankers retire.
This is a serious issue for banks, because CRE lending and C&I lending require different skill sets. At large banks with the resources and scale required to support permanent training programmes, transitioning a bank relationship manager from commercial real estate to commercial and industrial lending is not too onerous a burden. Among resource-constrained regional and community banks, however, training programmes have atrophied in recent years or been eliminated entirely. The lack of established training programmes will make it difficult for many US banks to quickly transform existing CRE bankers into productive C&I relationship managers, a delay that will serve as a drag on efforts to expand commercial and industrial loan portfolios.
Outdated and Decentralised Systems
Also working against these efforts are the decentralised systems and organisational structures still in place at many smaller regional banks. In the current recessionary environment, centralised systems for credit approval, underwriting, risk management and ongoing monitoring are essential in all types of large-scale lending. In C&I lending, these centralised functions must also be supported with robust and relatively sophisticated systems designed to provide an understanding of collateral at the level of client accounts receivables and inventories. Most large regional banks in the US started out with decentralised processes that allowed for credit approval and other functions to be carried out at the local level – partially as a result of growth through acquisitions – but many have since restructured and centralised operations.
“Unfortunately, many smaller banks have yet to take this step, and as a result lack the strong central controls required to support significantly higher levels of C&I lending in today’s market,” said FTRANS chief executive officer (CEO) Dan Drechsel.
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