The Fear of Lending
Deregulation is now a word my teenage sons understand. They’ve heard it enough from the news and my mouth. What they don't understand is how a washing machine works. But that's another issue for another time.
There's an excitement around the financial world when it comes to rolling back regulations. Bank and credit union leaders believe the Trump administration is going to be a friend to them in that regard. And that could be the case.
Underneath that excitement though, is a worry about lending and the potentially dangerous path that lies ahead. This is due to the double-edged sword of attempting to pull back regulations and cut taxes. Can both happen? Again, maybe. Maybe not.
A recent article in The New York Times reported that financial executives are deeply concerned “about taking on too much debt.” This is due to a number of factors including the failed efforts of getting much done in the current political environment, as well as the Federal Reserve raising rates and, let's not forget, the possibility of the Glass-Steagall Act coming back into play. Oh, and the Prepaid Card Rule, according to reports, has a 90% chance of being shot down by Congress.
Optimism had been high in the financial world after Trump was sworn in. The stock market made some significant gains post-inauguration. But after the failure to repeal and replace the Affordable Health Care Act, as well as a few other missteps by the new administration, things are beginning to flatten out a bit.
According to federal reports, there's a more somber atmosphere taking over the lending marketplace. “Data from the Federal Reserve showed that lending in February was flat, while lending to manufacturers and energy companies was in decline, after many months of growth,” according to The New York Times. Just so you don't think that we’re this left-leaning liberal rag, Fox News reported the same thing, stating earlier this month that “Big U.S. banks revealed more evidence of a slowdown in loan growth in their earnings reports.”
CU Times did report in March that “credit union loans grew in January at their fastest rate in 17 years.” But those numbers, from CUNA Mutual Group's monthly economic update, appear to rely mostly on small business loans and auto loans, which “showed unusual strength.”
While many big banks are reporting more record profits this year already, loan growth has started to slow down across the non-cooperative financial space. J.P. Morgan Chase & Co., Citigroup Inc. and others are keeping an eye on it.
With the Federal Reserve indicating that we will see two or three more rate hikes this year, and the US Treasury yield has basically flat-lined, this gives us some strong suggestions that we could be in a recession by the end of the year if there isn't some kind of correction in the market.
In 1933, the Glass-Steagall Act was born out of the ashes of the Great Depression to help decrease the likelihood of future financial crises. In 1999, it was repealed. Less than 10 years later, we fell into the Great Recession (I enjoy Cliff-Note history lessons). And now there's a shiny, new version of the Glass-Steagall Act that's poked its head out of a bipartisan group in Washington. I call it the Glass-Steven-Seagal Act, because the big banks and big bank executives aren't fans and they’re a little scared – just like normal people are about Steven Segal and his movies.
The new iteration of this bill would separate traditional banks that have savings and checking accounts insured by the FDIC or NCUA from “riskier financial institutions that offer services such as investment banking, insurance, hedge fund and private equity activities.” And oddly, President Trump appears to be for building this wall between commercial and investment banking. Lawmakers understand that the culture of risky banking behavior continues today.
Those big bank executives are warning legislative officials that lending programs could be pulled back even more if Glass-Steagall comes back.
As of now, credit union leaders are quiet on this front. And from conversations I’ve had with some executives, they are hopeful (as they tend to be) that this move could help in that always-ongoing effort to level the lending playing field between banks and credit unions to a place that “would return banking back-to-basics.”
To me, our financial environment feels a lot like things did in 2008 just before the economy fell off in a terrifying way. Also, it feels a little more hopeful because we are witnessing such an engaged society, industry and membership base.
My advice? Don't take a wait-and-see approach with this political environment. As banking and community banking industry leaders backed off of their promise to fight credit unions on the tired argument to repeal the tax-exempt status, credit union leaders should reach out to the banking industry to find some common ground to fight together. Because both sides want to grow in all areas of lending, the consumer base, products and services. But with so much uncertainty at every turn, this could turn out to be a watershed moment for everyone. Or another financial disaster.
Oh, and keep an eye on the possibility of a government shut-down at the end of April.
And to my sons: Separate colors, put clothes in washing machine, add detergent and softener, turn on.
If only the financial world were that simple.