Jan. 22, 2012
Special Report: Measuring the impact of the Great Recession on bank lending
After the nation’s financial sector nearly collapsed in 2008, bank lending to Fox Valley small businesses declined sharply as the local credit market essentially froze, according to data from the federal government.
In the Appleton-Neenah-Oshkosh metro area, small business lending fell from $542 million in 2007, when the Great Recession started, to $328 million in 2009, when the recession ended, according data available through the 1977 Community Reinvestment Act, which requires large and mid-size banks to report small business loans.
Lending slipped again in 2010 — the latest year for which data is available — to $317 million, off about 34 percent compared with inflation-adjusted lending in 1997, the earliest year for which data is available.
The data provide a powerful illustration that the national financial calamity had deep and protracted reverberations in the Fox Valley.
“It confirms what you’ve heard small businesses saying — they just didn’t have access to credit at all,” said Kevin Quinn, an economics professor at St. Norbert College in De Pere. “In a sense, it’s our lost weekend. This is time we’re never going to get back. We were less than stuck in neutral — we went backwards.”
But Quinn and other economists are already seeing signs a new life in the national economy, which likely indicates a turnaround in the Fox Valley’s commercial and industrial credit market as well.
“If you look at the economic data — not that everything is fully recovered — but it’s definitely stabilizing (or) improving compared to what it was a year or two ago,” said Thane Bublitz, senior equity research analyst for Thrivent Financial for Lutherans in Appleton. “Commercial lending (nationally) has been on the uptick quite a bit in recent quarters.”
After the housing bubble burst in 2008, banks became increasingly reluctant to add risky loans to their balance sheets and grew more scrupulous in their lending practices, which caused credit markets to tighten across the country.
But Bublitz said other environmental factors squeezed lending practices even further.
“There was a period of time when the demand for commercial loans just wasn’t there,” Bublitz explained. “Businesses just were not interested in borrowing, and on top of that the banks had restrictions on how much they could (loan).”
As the economy contracted, small businesses had little reason to expand by borrowing money.
“When there’s less demand, there are obviously (fewer) loans for banks to choose from, and it’s tougher to make good loans,” Bublitz said.
At the same time, he said, banks faced “competing mandates” from regulators.
“On the one hand, (banks) were really forced to pull back on some of their lending because the regulators wanted them to build capital,” Bublitz said. “On the other hand, they were being pressured to increase lending.
“There was an aspect that the banks were lending less because they perhaps didn’t want to use their capital in that way because they saw the loans being riskier,” he continued. “But there were also other factors in the environment that were really making it less likely for them to lend.”
Though economists say demand for commercial loans was stronger in 2011 and will continue to ramp up in 2012, they caution that an easing in the credit market depends largely on the strength of the broader economy.
“We need the larger, big machine of this economy to kick in,” said Gary Vaughan, a small business consultant and lecturer at Lawrence University in Appleton. “Until that happens, we’re all going to survive. We’re not going to flourish — we’re going to survive.”
Stephen Tramp, market president for Associated Bank in the Fox Valley, said many small businesses in the region “rely on the trickle-down effect from the large companies making capital purchases.
“This is beginning to improve and should increase throughout 2012,” Tramp said.”
But economic growth may be hampered, at least in part, by lingering roadblocks to capital and investment.
“If you don’t have banks willing to lend and if you don’t have individuals and businesses willing to expand or start new businesses, where’s the growth going to come from?” St. Norbert’s Quinn asked. “When we have recessions that are the result of credit crises, they tend to be deeper and they tend to take a lot longer to get out of. This is exactly why.”
To break that cycle, Quinn said, the economy needs a boost in confidence.
“It’s between the ears; it’s not the bank account,” Quinn said. “You have to have actual people who think that it’s worth taking a chance to invest their life savings and to convince loan officers who live in the same world we do — they’re just as scared as anybody else — to take a chance.”
Quinn placed blame for the lack of confidence squarely at the feet of state and federal politicians, who he said have created unnecessary national crises, such as the debate about raising the national debt limit and recent tensions with Iran.
“Honestly, it’s been one body blow after another for quite a long time now,” Quinn said. “All that stuff kills us. It creates a very uncertain environment.”
Bublitz said economic indicators suggest some degree of confidence may have already returned as the economy picks up steam.
“The economic data is improving,” Bublitz said. “Businesses are seeing more opportunities for expanding and they need to borrow to grow their business.”
The Wisconsin Bankers Association released a report on Monday that suggests local bankers feel increasingly optimistic about the credit market this year.
In a survey of 144 bank executives from across the state, about 99 percent expect demand for commercial loans will either grow or hold steady over the next six months.
“The fact that banks are poised for growth indicates that the industry is stabilizing and that both the economy and the banks in Wisconsin are getting stronger,” Rose Oswald Poels, WBA president and CEO, wrote in a statement.
“There is plenty of money available for quality small businesses that have a solid plan and good management,” Associated Bank’s Tramp said. “(We) and many of our competitors have been through the rough part of the cycle and are once again looking for growth. Companies that have solidified their businesses, based on the uncertainty in the last couple of years, should have no problem finding banks willing to lend to them again.”
About this report
The Great Recession, from 2007 to 2009, and its fallout dramatically changed lending practices by banks. To determine the severity of the
impact on the Fox Valley, The Post-Crescent analyzed data made available to the public by the federal government.
SEARCHABLE DATABASE: Click on this story at postcrescent.com to search for details about lending by all banks in Calumet, Outagamie and Winnebago counties from 1997 through 2010.
WHAT DO YOU THINK? Chat real-time on postcrescent.com at 2:30 p.m. Monday with reporter Michael Louis Vinson about the dramatic drop in loans to local small businesses following the financial sector free fall of 2008, and what it means to Fox Valley workers, employers and consumers.
By the numbers
Congress enacted the Community Reinvestment Act in 1977 to encourage and monitor business, farm and community development lending in moderate- and low-income neighborhoods. State banks, national banks and savings associations that have at least $1.1 billion in assets are
required to report the number of small business loans made in a given year and the total amount of those loans.
Both the number of small-business loans and total amount of those loans fell sharply in the Appleton-Neenah-Oshkosh metro area after the 2008 financial-sector crash. What the data show from 1997 through 2010, the earliest and latest years for which such information was available:
Year, Total loan amount, Total loans
» 1997, $356 million, (4,317)
» 1998, $483 million, (5,077)
» 1998, $478 million, (5064)
» 2000, $405 million, (5,805)
» 2001, $523 million, (7,620)
» 2002, $521 million, (9,310)
» 2003, $580 million, (8,724)
» 2004, $540 million, (8,524)
» 2005, $521 million, (8,875)
» 2006, $519 million, (10,826)
» 2007, $542 million, (12,664)
» 2008, $524 million, (10,028)
» 2009, $328 million, (4,609)
» 2010, $317 million, (4,238)
Source: Community Reinvestment Act reports
Milwaukee-based M&I Bank accounted for about 37 percent of the small-business loans approved in the Fox Valley in 2010, the latest year for which data was available.
» 1. M&I Bank: $117 million (522 loans)
» 2. U.S Bank: $50 million (970 loans)
» 3. Associated Bank: $35 million (192 loans)
» 4. Johnson Bank: $21 million (72 loans)
» 5. Wells Fargo Bank: $19 million (402 loans)
» 6. Chase Bank: $19 million (628 loans)
» 7. Baylake Bank: $10 million (53 loans)
» 8. Citizens Republic Bancorp: $9.5 million (65 loans)
» 9. Community Bank & Trust: $6.5 million (40 loans)
» 10. North Shore Bank: $5 million (15 loans)
Source: Community Reinvestment Act reports
— Michael Louis Vinson: 920-993-1000, ext. 368, or firstname.lastname@example.org; on Twitter @MichaelVinson