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Why aren’t (some) banks lending?

In his testimony to congress, Independent Community Bankers of America President Michael S. Menzies Sr. (President and CEO, Easton Bank and Trust Company) lays out the case for the balance between increased credit availability and prudent lending practices.

Looking for sound-bite explanations when someone asks:

Why aren’t you lending???

Trying to understand the answer to that question yourself?

In short, the examiners are focused on safety and soundness and there is significant disagreement on what that really means. Just as one example:

You have a commercial real estate loan on the books. The owner is a long-time borrower of the banks, has a strong credit history, has no plans to sell the real estate and is paying as agreed. The real estate value, however, has dropped. The examiner may think you need to write-down and reclassify the loan. This increases the requirement for loan loss reserves and reduces the bank’s ability to lend.

The bank is still receiving the payments and based on their best judgement and knowledge of their customer, they expect to. The examiner feels compelled to focus primarily on underlying value of the asset in a frozen market and believes the loan is impaired.

The disagreement about ‘safety and soundness’ is having far-reaching consequences. In the worst case scenario, a bank can actually fail as a result. The bankers would argue that their ability to continue to provide the credit that America’s businesses need to weather the economic storm is hanging in the balance.

Do you have any examples of situations where this difference of opinion is restricting the availability of sound credit?

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.