Keith Gossler As chief banking officer for Northern Trust Bank, Keith is directly responsible for the lending and banking activities of the Personal Financial Services division. Keith has more than 30 years of progressively challenging banking experience. He currently sits on the board of directors of the The Northern Trust Federal Savings Bank, the Northern Trust Company’s Senior Loan Committee and the Corporations Asset Liability committee.
Throughout the recent economic crisis, it was a familiar lament: Consumers and small businesses can’t get loans to jumpstart spending because banks aren’t lending. Yet if the federal government has pumped billions of stimulus dollars into the financial system, why have these banks stopped or slowed making loans?
The short answer is: They haven’t. In fact, according to the U.S. Treasury Department’s monthly bank lending survey released at the end of last year, banks continue to originate, refinance and renew loans despite significant headwinds posed by the unprecedented financial market crisis and economic turn.
Nontraditional Lenders Pull Back
During the booming economy that led up to the 2008 start of the credit crisis, nontraditional lenders — mortgage companies, credit card companies, and private equity and hedge funds — had become major sources of credit for individuals and small businesses. But it’s these nontraditional lenders that have begun to pull back.
Credit card lending, for example, once an easy source of unsecured funds, has been significantly curbed: 58 million cardholders had their limits reduced between April 2008 and April 2009, according to Fair Isaac Corporation.
On the other hand, the country’s top 22 banks receiving capital injections from the U.S. government collectively reported an increase in lending in several categories, including small business. Although the total outstanding balance of small-business loans fell 1% in June, the total number of small-business loan originations surged 26% over a month earlier, according to the Treasury’s latest monthly bank lending survey.
How did this situation arise? Part of the explanation traces to lending standards and regulations. Nontraditional lenders were bound by less stringent underwriting standards and federal and state lending regulations than traditional banks, making it harder for traditional banks to compete. Now, in the face of mounting losses on bad loans, these same companies have upped their credit standards — voluntarily or not — and contributed to the “tightening” of credit availability.
Keith Gossler, chief banking officer at Northern Trust, says, “The small business owner who is dependent on equity credit lines and credit cards to finance his or her business is being faced with a different set of challenges than two years ago when credit was easily attainable and relatively inexpensive.”
But with nontraditional credit now harder to obtain, traditional banks are filling the void. “I think [traditional bank lenders] have gained market share during this recession because nontraditional lenders have left the market,” says Keith Leggett, chief economist for the American Banker’s Association in Washington, D.C. “These nontraditional players are not in a relationship business. Banking is a relationship business, and therefore banks are there for the long run with regards to their customers.”
Leggett says that although times may be tough, the situation is improving, and this is not like recessions of the past. “Bank lending is up right now. Even though in the last couple months it has slipped, it’s still higher than it was at the onset of the recession, and this is atypical of past recessions.”
Federal Stimulus Has Positive Effect
It’s still early, but the federal stimulus programs appear to have had positive effects on lending. Leggett says the Capital Purchase Program has helped narrow credit spreads, while the Federal Reserve’s active intervention in buying mortgagebacked securities has pushed down mortgage rates.
Gossler also recognizes the potential of new stimulus programs and says businesses are still learning how to take advantage of the stimulus package’s investment in the country’s fatigued infrastructure, such as roads and bridges. “We’re just now hearing from engineering and architectural firms saying there are projects on the horizon they’ll be able to participate in, which bodes well for the construction industry,” Gossler says. “I think that will have a nice impact on the economy in the near future.”
Financial Solutions for Quality Borrowers
Lenders now are requiring better risk profiles and tougher loan terms, according to Leggett. But the absence of competitors, many of which went under or merged during the recession, has still allowed some banks to increase total lending.
For example, year-over-year at the end of June, Northern Trust had increased total loans outstanding activities by 11%. “We’re getting the opportunity to really go after the quality clients that we’ve always sought,” Gossler says.
“Now we’re looking at an environment where the competitors are weakened and exiting entire markets, allowing us the opportunity to go in and provide financial solutions to excellent borrowers with great track records,” he adds. “Clients are now placing a much higher value on relationships, valueadded and sustainability in their field rather than price and terms alone.”
Gossler notes that while many banks are requiring better risk profiles from borrowers, credit is still available for creditworthy individuals with a solid income stream and equity built up in their assets, and this environment provides a unique chance for people with higher incomes to purchase assets at reduced prices.
“We’re seeing affluent people saying, ‘If I always wanted that second home by the water or on the golf course, now is the time to do it,’” Gossler says. “We’re also seeing depressed values in some of the best communities, so it’s become very opportunistic for these people to take advantage of this dip in the market.”
Revisit Financial Obligations, Goals
He also advises all banking clients to sit down with their relationship managers to review their liabilities and revisit the different layers of debt they might have. Refinancing, locking in lower rates, and using leverage where appropriate to make long-term investments all may be beneficial right now. A trusted banker who understands you and your family is a vital partner along with your attorney and accountant to help you achieve your long-term goals, Gossler says.
Now is also the time to think about your family legacy from a long-term perspective. “Think about what you want and what type of legacy you want for you and your family,” Gossler says. “Look at the personal assets that might be a part of that legacy and see if now is the time to purchase those types of assets.” He also suggests looking at your gifting strategies for real estate assets as well as financial assets. It may be appropriate now to maximize those bequests with the proper tax and estate planning.
Revisit Long-Term Financial Goals
During unpredictable times like these, however, awareness and due diligence are still key components to financial success. “Even in a recession as deep as this, there are opportunities,” Gossler says. “And a long-term approach in what we think is a cyclical, albeit significant, downturn is very important.”
