Banks, like humans, fear the unknown. If they can’t assess the value of an asset, say a 10-acre piece of dirt in Henrico County, they don’t want to touch it with a 10-foot pole. And if they don’t trust each other, they won’t lend overnight, which is part of the grease that keeps the financial system humming. Or did.
Nobody seems sure how exactly all the tribulations from the world of Wall Street finance will play out locally either. (If they say they do, run the other way.)
I spoke with First Market Bank’s CEO Dave Fairchild yesterday to find out what he’s seeing and what businesses might want to keep in mind during these interesting times.
Below is an edited transcript of our conversation:
RBS: Let’s jump right in. How is all this fallout affecting local banks?
DF: We were not caught up in those – in essence – toxic investments. The issue is, trying to figure out how all of that will affect the overall real estate market, and that’s yet to be seen.
RBS: Commercial real estate brokers and developers are all telling us that it’s getting near impossible to get financing. Is that true?
DF: Clearly, this made most banks freeze up. Everyone is trying to preserve their capital. It’s even greater at the big banks than the community banks. Part of the issue is banks are afraid to lend to each other.
RBS: Do you think there will be consolidation with local banks?
DF: Yes. Across all of banking, there will be pretty significant consolidation in the next 24 months. There will also (likely) be new capital requirements.
RBS: How are day-to-day operations going?
DF: It’s business as usual. We get questions every day about the security of customer deposits. Everybody is scared. So we remind them about FDIC insurance coverage (which insures up to $100,000). The whole general financial malaise has spooked everybody.
RBS: How about lending to businesses?
DF: Everybody is being a little more cautious. Requirements for credit underwriting have notched up. Loan rates have notched up.
RBS: Are you calling loans to get your money back?
DF: No. We’re looking at them to make sure projects are finishing up. We’re making sure there’s enough to carry houses with given inventory. It’s not like what people read in the headlines.
The bank scene here is more affected with what’s going on in the general economy, and our economy could be affected some by a financial meltdown. I think everybody is waiting to see. Steps that had to be taken to put confidence back into the system. As long as financial markets get going normally, that bodes well for us and that will lessen the effect of an economic downturn.
RBS: Are rates on business loans creeping up?
DF: When you have a capital squeeze, capital is important to have, and it’s scarce. Banks are having a harder time attracting new capital and must preserve the capital they have. Obviously, it’s more appealing to get a return on that capital. So, in theory, yes, but I don’t think that just driving rates up is going to necessary spur a lot of additional lending.
RBS: What’s your advice to a business that might need capital?
DF: Any good business plan in the right industry that makes sense is very viable. Banks have funds to lend. Obviously, real estate is one of those sectors that because of potentially more inventory than can be absorbed is tougher.
Aaron Kremer is the BizSense Editor. He did not invest in derivatives or collateralized debt obligations. If you know ways that BizSense might better localize this unfolding story, or you think you can explain it, please email [email protected]