I want to highlight a great comment that a reader, a former commercial banker named Sheila Spangler, left today on our story about rising business bankruptcies:
As a former commercial lender, I’m appalled that bankers are forcing small businesses into bankruptcy rather than doing a workout. Banks’ balance sheets are “fragile” because [they] reduced credit standards to follow the crowd. The unwillingness to work out of problem situations is especially true of the large banks. The locally owned independent bankers are much more likely to work out payment arrangements with business owners. Probably because the decision-makers live in the community in which they serve. It’s more difficult to be hard-hearted when your neighbor, club member or friend is requesting that you help him save his business. I am working with some business owners in this regard. In my prior life as a commercial banker, every one of the banks I worked for referred to themselves as a “relationship bank”. Well, it is apparent that the “relationship” only works one way. That’s NOT a relationship that anyone can be in successfully. Come on bankers, small business owners need you now more than ever. Don’t follow the crowd like you’ve always done. We need bankers with the mental toughness and guts to take a stand and do what’s right for business owners.
Banks — especially the ones that took TARP funds — have been in a bind since last fall. They’re under pressure on one hand to increase the flow of credit to households and businesses, and on the other hand to reduce the risk on their books. It’s easy to understand why banks would push to recover whatever they can immediately from small companies facing insolvency, considering the cost and time involved in doing workouts with companies that may not be viable in the long term. As Sheila points not, it’s not relationship lending, it’s simply looking at the numbers. The irony is that the companies filing bankruptcy right now are small enough to fail — while many of their creditors, who have no patience for workouts, are only around because the government rescued them.