Commercial Lending as an industry has suffered some pretty hard blows recently starting with the Fed rate hikes that have more than doubled the carry cost for capital and turmoil at banks who are struggling to make loans. With interest rates above 5% all banks are now insolvent including the big ones who, despite the fact they are getting helped by the government to soak up smaller banks, are still shedding billions in deposits too.
The problem most business owners are dealing with now is when it comes to borrowing is "availability" of capital as well as higher cost.
Many banks are stuck dealing with deposit runs and that is causing hesitancy to originate new loans or even renew existing ones. Almost 500 Billion dollars in deposits have left the banks in favor of money market funds in the first 5 months of this year! That is huge! Banks are scared to make new loans even though they can earn higher interest because they are hemorrhaging deposits.
Many of the owners I speak with are seeing their existing lines of credit reduced or eliminated. Others are seeing loan agreements months in the making collapse at the last minute due to factors unrelated to the borrower. Recently, an $8 Million facility blew up the day of closing when one of the syndicate banks folded at the last minute causing immense distress and probably lawsuits.
As if the current finacial conditions weren't bad enough, banks are now having to deal with external challenges from government imposing unrelated restrictions and obligations onto banks such as ESG and DEI scores. These are Climate and social justice issues completely unrelated to running a profitable bank yet, here we are!
"The commission in February tightened its rules to make designated banks more accountable to the public by asking banks to provide detailed plans and specific steps to combat lending and employment discrimination."
Banks now have to make new policies, hire new staff and submit regular reports to government officials at City, State and Federal levels which show they adhere to the new, imposed standards for climate and discrimination. A bank that simply wants to do banking isn't allowed.
Some banks are missionaries for social issues on their own and use those non-banking standards to refuse entities they disagree with:
"It is clear that JPMorgan Chase & Co. (Chase) has persistently discriminated against certain customers due to their religious or political affiliation. This discrimination is unacceptable. Chase must stop such behavior and align its business practices with the anti-discrimination policies that Chase proclaims."
"In May 2022, Chase abruptly closed the National Committee for Religious Freedom’s (NCRF) checking account. NCRF is a ‘nonpartisan, faith-based nonprofit organization dedicated to defending the right of everyone in America to live one’s faith freely.’ NCRF’s National Advisory Board includes Christian, Hindu, Jewish, and Muslim members…"
It's not hard to understand why capital availability is challenging right now. Private lenders have seen a big increase in requests from business owners who normally use bank financing. There are many reasons for this but the main one is that banks are simply lending far less than before. Private lenders aren't affected as much because they don't have to consider anything but financial parameters when approving funding.
Here are three things to remember about the money you "have" in the bank:
#1. The money isn’t really yours. You’re just another unsecured creditor if the bank goes bust.
#2. The money isn’t actually there. It’s been lent out to borrowers who are illiquid or insolvent.
#3. The money isn’t really money. It’s credit created out of thin air.