State chartered banks are positioned to weather current economic turmoil
Tom Gronstal
Superintendent, Iowa Division of Banking
All of the turmoil in the financial markets puts banks in the spotlight. Everyone from politicians, economists, and media pundits to cab drivers and store clerks voice opinions on who to blame. This article gives an Iowa perspective on the mortgage crisis and the future for Iowa financial institutions.
Iowa state chartered banks have almost no direct exposure to sub-prime mortgages. Almost all of the sub-prime credit originated in Iowa was sold to investment banks and securitized. Iowa state chartered banks own very few, if any, securities backed by sub-prime mortgages. However, many Iowans face financial hardship and foreclosure.
On average, Iowa state chartered banks have strong capital, good asset quality and good earnings. The large majority of Iowa state chartered banks are very well positioned to weather the current economic storm. There are banks which have increasing asset classification and poor earnings due to commercial and development lending. Some banks are having trouble hiring and keeping qualified and experienced lenders and management. So while the averages still look quite good, problems are beginning to surface. Each bank must manage its problems to produce the desired results of better asset quality and improved earnings.
As problems increase, pessimism starts to dominate decisions. Both borrowers and lenders reduce their appetites for risk as economic activity slows. Problems tend to dominate time and effort, and it is easy to forget the positive aspects of business. Even banks with very high classification usually have more than 90 percent of their assets performing according to contract.
The current economic climate in Iowa is far better than most of the nation. For the first time in decades the agricultural economy did not lead the rest of the economy into recession. Employment is still strong in Iowa. The development of alternative energy and food production puts Iowa at the epicenter of two of the most important issues of our world. So while we have plenty of things to work on, we also have plenty to work with.
Maintaining the balance between working out problem credits and prudent new lending is essential for the long-term health of our economy and banks. If we shut off credit to nearly everyone concentrating only on reduction of troubled debt, we prolong recession and damage the long-term prospects for our institutions. If we spend too much effort on growth and credit expansion while ignoring problem loans, liquidity and capital problems will overwhelm us.
Iowans facing personal financial crisis need support and guidance. Many of them will be able to work through their problems with minimal help and others will face devastating losses. Lenders and borrowers will all fare better by looking for fair and reasonable solutions without wasting time and effort on assigning blame.
The current economic situation will produce winners and losers. The losers will be the ones who blame others for their problems and put little or no effort into correcting mistakes. The winners will actively recognize problems, solve problems and continue to manage their institutions positively.
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