California banks are solvent, making loans

By Rodney K. Brown

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There is no dispute that our country is facing some of the most troubled economic times we have seen in decades. What can be disputed, however, is the disturbing amount of misinformation characterizing the role of the banking industry in the economic crisis, providing the mistaken impression that banks are not lending and calling into question the safety and soundness of the nation's banking system.

First, let me carefully distinguish between banks and nonbank financial institutions. The banking industry is one of the most regulated industries in the country. Regulation of a traditional bank is strictly guided by more than 6,000 pages of documents that govern daily operations.

Nationally chartered bank performance data is collected quarterly and continually monitored by a primary regulator and the Federal Deposit Insurance Corporation (FDIC). Onsite examinations are conducted every 12 to 18 months, or more frequently if warranted. State chartered banks in California are supervised by the Department of Financial Institutions and the FDIC.

This is in stark contrast to other unregulated businesses or less well regulated financial institutions, many of which were responsible for the residential mortgage meltdown and no longer in existence today.

Second, banks in California are lending. California banks made more loans in 2008 than they did in 2007. According to the FDIC data, in 2008, total loans and leases for the 311 commercial banks and savings institutions headquartered in California were up

$3.2 billion from 2007. While loan demand tapered off in the fourth quarter last year, that is to be expected during difficult economic times. California's unemployment rate stands at 10 percent, and borrowers, as they should be, are being more careful about taking on new debt.

Additionally, while banks continue to lend, they cannot offset the dramatic fall-off of credit outside the banking industry. Thirty years ago, banks provided about 60 percent of all credit; today traditional bank lending provides less than 30 percent.

The collapse last year of the secondary markets for mortgages and other consumer credit products, including credit cards and auto lending, removed an important pipeline for credit. Recent media stories about the lack of credit are due to the weakness of nonbank lenders and the weakness of the securitization markets.

President Obama's administration has recognized the impact of these constrained markets, and earlier this month, the U.S. Treasury Department announced plans to launch the Term Asset-Backed Securities Loan Facility (TALF) to help provide much needed financing to get these markets moving.

Finally, there has been a disturbing notion prevailing in the mainstream media which implies that banks receiving Capital Purchase Program funds from the Troubled Asset Relief Program (TARP) are in "trouble" and in need of a bailout by the taxpayers.

Nothing could be further from the truth. While the original purpose of TARP, as the names suggests, was to purchase troubled assets from the banks, within a few weeks of Congress creating this program, Treasury officials changed course and decided to use the funds to make additional capital available to healthy banks to encourage lending. Recipients of capital purchase program funds receive a careful review by their regulator, and only those deemed healthy receive funds — which must be repaid to the government at an interest rate from 5 to 9 percent. This year alone, Treasury is slated to receive between $10 billion and $15 billion in dividend payments from capital purchase program recipient banks.

There is no question that these are difficult times. However, the banking industry in California is well capitalized and prepared for economic weakness. As a bank customer, your deposits are protected by FDIC insurance up to $250,000. FDIC insurance premiums are paid by the banks, for the benefit of our customers, and not one penny of FDIC insured deposits has been lost. Be assured that California's banks are weathering the current economic storm and have the resources to continue to serve the needs of our communities, and provide the same level of high quality and trusted service that is a trademark of California banks.

Brown is president of the California Bankers Association, whose members include nearly 250 commercial, industrial and community banks and savings associations.