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As the rocket gets lit, are banks prepared?

If Trump strategy works, community banks must be ready for role in economic prosperity

“There’s really not much that indicates we’ve learned anything new over the last several cycles,” says veteran lender and CEO Ed O’Leary. He aims to fix that. “There’s really not much that indicates we’ve learned anything new over the last several cycles,” says veteran lender and CEO Ed O’Leary. He aims to fix that.

As commercial lenders view the coming year, they appear to be forming a series of questions, yet somehow not fully realizing the opportunities that may lie at hand.

Top tier questions about the economy

From a high-level perspective, what do we collectively anticipate President Trump’s policies will produce for our economy?

Among Trump’s broad economic campaign issues were reduced regulations for banks; reduction of marginal tax rates to make American businesses competitive with the industrialized world; and the repatriation of untaxed offshore profits from American companies.

The latter two points are interrelated. Most people believe that a reduction in marginal tax rates will create a huge inflow of excess capital.

The real issue for bankers though is whether there can actually be a meaningful reduction in the regulation of the banking industry. None of us are advocating a repeal of regulation, but rather a hard-eyed look at the effectiveness of many of the provisions of Dodd-Frank.

Mezzanine level question for bankers

To what degree does a genuine growth spurt in business activity (GDP) depend on the banks?

We seem to be adequately supplied with liquidity. Most community banks are not constrained by capital. So this question is really about our willingness to support a rapid and significant growth in business lending, most likely concentrated in small- to medium-sized business borrowings.

So, let’s rephrase the question: Are we able and willing to respond to a significant increase in market demand for commercial loans should this occur during the first year or two of the Trump presidency?  

This is about our appetite but perhaps more specifically our attitude toward risk after years of being gun shy.

The trap for lenders here is subtle.

Many bankers pride themselves on being strong and willing competitors. But have we all been chasing a rather small (by historical standards) number of attractive lending prospects with terms—rate, covenants, maturities, and the like?

How many banks have used the respite of the last few years honing staff skills on how to be “consultants” to our borrowing customers?

How trained and able are our people to proactively help our borrowers succeed and prosper?

I hesitate to use the term “consultant,” because it harkens back 30+ years ago to a famous court decision in Texas that created a lot of heartburn—and misunderstanding—for bankers.

Old timers like me recall the talk about and the swift reaction to the Farah Manufacturing case where a bank was held liable for a series of actions deemed to have resulted in bank “interference and control” of a customer’s business. Farah was one of the early lender liability cases.

Bankers today can understand it as the “Pottery Barn” rule: You break it, you own it.

A generation of small business borrowers was denied the advice and counsel of commercial lenders due to a concern that lenders, by their actions, were directing and intervening in the business of their customers.

We have spent enormous sums on training and coaching programs on how to sell and many banks have taken this to an “art form.”

But do we really teach our platform people and our younger lenders how businesses work and how we might help borrowers be more successful?

The mission statement issue for commercial lenders

The long-term holistic response by the banking industry has two primary challenges:

1. How do we as an industry help grow the size of the economic pie?

I’m not talking about stimulating loan demand by recycling a finite number of customers from one bank to the next. It’s a fundamentally strategic question of how do we make the market place bigger and more robust?

2. Are we training our staffs for an era of 4% or better GDP growth?

The wisdom of Scripture refers to how “new wine” poured into “old skins” will destroy the skins themselves.

Are we, by ignoring or, even worse, contributing to future stresses and strains by simply not thinking critically and strategically on whether we are ready for a significant spike in lending business?

The very large banks are ready.

Their resources and breadth of capability and capacity are world class. I’m talking instead about community banking— where most small business incubating and birthing takes place.

Consider this:

• Are we looking at our customers and prospects as individual opportunities, with their own unique sets of opportunities and challenges?

• Can we help them with our accumulated knowledge and a product suite tailored to their capabilities?

• Are we ready to be leaders in economic development initiatives and practices in our local communities?

For many community banks, especially those plagued with “small time thinking,” we are about to get the chance for another significant bite of the apple.

We have got to think systemically, strategically, and urgently to capitalize on what for all of us may be just around the corner.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at etoleary@att.net. O'Leary's website can be found at www.etoleary.com.

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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