Local credit again tightening
A pair of surveys suggests a renewed tightening of commercial lending standards in Connecticut and the tristate area. This comes as local banks barrel toward the July implementation of the Dodd-Frank financial reform act ”“ with as yet unknown consequences on credit terms and availability.
Despite improvements in some economic indicators, businesses told the Connecticut Business and Industry Association and TD Bank that loan availability has been backsliding in the past few months. This contention is backed up by the Federal Reserve Bank of New York, which last month reported tightening credit standards in most business loan categories.
Just 10 percent of those polled by CBIA said credit conditions are good and nearly four in 10 expect credit conditions to deteriorate.
“The economic recovery is being pushed and pulled in every direction,” said Pete Gioia, vice president and economist with CBIA, in a prepared statement. “Just when consumer spending started to improve, rising oil prices began siphoning off disposable income, causing market concerns.”
The banking industry, meanwhile, is bracing for the advent of financial reform under the Dodd-Frank bill. At its annual directors and senior officers symposium this week in Plantsville, the Connecticut Bankers Association scheduled one of two keynote addresses on challenges poised by Dodd-Frank on community banks, delivered by David Wiese in the Hartford office of Hinckley Allen Snyder L.L.P.
And in early May, the Independent Community Bankers Association amassed some 1,000 members to lobby legislators on what it termed a harsh regulatory examination environment and a suffocating regulatory burden, among other issues. Savings banks that have long been regulated by the federal Office of Thrift Supervision will now be under the oversight of the Office of the Comptroller of the Currency, with the OCC universally seen as a more-stringent regulator.
Jennifer Kelly, the OCC”™s senior official responsible for community banking supervision, testified last month on the impact of the Dodd-Frank bill before the U.S. Senate”™s Banking Committee. She said OCC examiners are taught to tailor their supervision of each community bank to its individual risk profile, business model and management strategies and that as a result examiners are given considerable decision-making authority, reflecting their experience and on-the-ground knowledge of the institutions they supervise.
The OCC maintains a number of channels for bank officers to reach out to the agency outside of the examiner point of contact, Kelly added, including an ombudsman office, “meet the comptroller” gatherings, CEO roundtables and teleconferences on varying issues.
“Although it is true that many bankers have adjusted and tightened some of their credit underwriting standards, most of the community bankers I talk to reiterate that lending is the backbone of their business and that they are seeking to make loans to creditworthy borrowers,” Kelly said.
For Kelly, a major question remains as to whether the implementation of Dodd-Frank could push compliance costs high enough on some lines of business to force smaller banks to drop them altogether. For instance, longstanding advisory and service relationships with municipalities may cause a bank to be deemed a “municipal adviser” subject to registration with the Securities and Exchange Commission.
“Some will exit businesses where they find that associated regulatory costs are simply too high to sustain profitability or they will decide how much of the added costs can, or should, be passed along to customers,” Kelly said. “Others will focus on providing products and services to the least risky customers as a way to manage their regulatory costs. Some will elect to concentrate more heavily in niche businesses that increase revenues but also heighten their risk profile. While we know there will be a process of adaptation, we cannot predict how these choices will affect either individual institutions or the future profile of community banking at this stage.”