Another guest post by my Bank Business Advisors colleague John M. Walker, Jr. He's not happy.
It’s time for those in Washington to take off their current, collective Chapeau de Derriere and get serious about solving the growing crisis among community banks in this country.As someone who’s spent more than 30 years as a “solver of other people’s problems,” a lesson I was fortunate to learn early in my career is that one first must identify the problem and then must “focus on interests, not positions” in order to solve the problem. It appears that no one in Washington was as fortunate as I in getting such an education.
Getting to Yes, a magnificent book about negotiating by Roger Fisher, William Ury, and Bruce Patton of the Harvard Negotiation Project, says it well – interests define the problem. Interests motivate people – interests are one’s needs, desires, concerns, and fears. Positions are something upon which one has decided. Focusing on positions hides the fact that there well may be interests in common upon which a solution to a problem may be found. But, to focus on interests, the interests must be identified – which means they must be discussed openly, honestly, and frankly. And, once interests are identified and discussed, problem-solving requires - among other things – that options for mutual gain be identified.
Here’s the problem facing community banks: they’re being force-fed a capital starvation diet; and, many of the community banks will die as a result if a solution isn’t found quickly. As best I can tell, there’s little “interest focusing,” but there’s a whole lot of “positioning,” going on in Washington – and that ain’t solving the problem.
It’s bad enough that the banks are suffering malnutrition under the burden of troubled commercial real estate (CRE) loan portfolios. But, to make matters worse, “tales from the crypt” describe regulatory exams now being conducted from a newly staked-out “position” of “I need to prove I’m the toughest regulatory SOB on the block.” The result is an almost Sherman-like march through local communities that is wiping out community banks’ capital based on the marking-to-market of illiquid CRE collateral. Assumptions made in valuing any asset are critical and inherently are subject to human bias; and, overly conservative assumptions that may be used in these exams that shorten the time periods for loss history used as a guide and that also forecast an overly bleak future can make bank death seem pre-ordained - or at least a self-fulfilling prophecy – when current loss recognition is required. At the same time, now “positioned” with his new found, politically-attuned populist religion and small business fervor, President Obama appears to be putting $30 billion of capital into a pants pocket of the community banks with his recently trumpeted loan program. But, just as it goes into one pocket, the capital is being taken out of the community banks’ other pocket at least as quickly and likely in far greater amounts by current loss recognition exacerbated by the exam process. The death spiral for the community banks continues and will continue unabated absent a problem solving approach based on interests, not positions.
People who work at or who are invested in these banks will continue to lose their jobs and invested capital. Communities often also will lose a major source of support for local community projects such as low income housing. Why is this community bank death spiral permitted to continue? We have an environment today where unemployment hovers around 10%, there appears to be general agreement that the greatest generators of jobs are small businesses, small businesses need capital, and community banks likely are the greatest source of small business capital. Why aren’t the interests affected by the community banks’ capital starvation first being identified and then discussed openly, honestly, and frankly so that options for mutual gain can be developed? How does one slow, stop, or reverse the community banks’ capital starvation so that these interests can be served? What “mutual gain” will be created by the competing positions that already are staked out within the executive branch in Washington - positions that will operate at cross-purposes and thus prevent the problem from being solved?
I wish I had all the answers – to the shock of those who know me, I must admit that I don’t. But, it does seem to me that one way to retard the march of this capital starvation is to take action that will reduce the impact of immediate loss recognition generated by the short-term, capital-threatening pressure of illiquid collateral/assets being marked-to-market in the midst of this financial melt-down. Although not a panacea for all that may ail the banks, why not let the losses incurred over a defined period of time related to this financial crisis be amortized over, say, a 10-year period instead of being recognized currently? Don’t tell me it can’t be done – having Washington actually focus on interests instead of positions and solve a problem as a result is no less bizarre than some of the other things we’ve seen from Washington in the last year.






