As recently as 1958, when I went to work in Wall Street, bankers took very seriously the idea of relationship banking. That is, bankers felt a moral responsibility both to evaluate the creditworthiness of potential borrowers, and to stick by those borrowers in their times of financial need.
Since then, investment banking and commercial banking have become vastly more abstract and impersonal, as the deals have become more colossal. Numbers, not personal character, seem to be the primary, if not the sole, criterion.
We are bombarded with TV ads assuring us that, no matter how bad our credit record, loans are available. Loans produced by such policies are part of the structured investment vehicles (SIVs) plaguing commercial and investment banks.
Banks are now so large that apparently senior officials no longer can monitor the quality of the assets they put on their books. The two most prominent examples are the CEOs of Merrill Lynch and Citicorp, who have lost their jobs for that reason.
Citicorp’s balance sheet footings, adjusting for inflation, are roughly 20 times larger than in the 1960s, when Walter Wriston, then head of Citibank’s foreign department, pioneered negotiable certificates of deposit, the first step toward banking abstraction.
The impetus for the absorption of local and regional banks into the global colossi was the 1970s stagflation engendered by President Lyndon Johnson’s Great Society welfare state, his essay at completing the New Deal’s socialism in our time. As inflation torpedoed the value of the dollar, interest rates rose to unprecedented heights, and larger financial institutions began to absorb weaker ones.
Before the surging growth of financial institutions’ balance sheets, young bank trainees were expected to absorb the “Four Cs of Credit,” which Steve Strauss defines as:
Capacity: What is your ability, and that of your business, to repay the loan? This is a matter of cash flow. For many bankers, your cash-flow statement is the most important financial document they consider when analyzing a loan request because it allows the bank to determine if you have the capacity to repay the loan. So the important thing is to show your banker a cash-flow picture that will allow you to repay the loan in a timely manner, principal and interest included.
Capital: How much money do you need and is that amount justified by your supporting documentation? The more money you ask for, the more bank officials will review your loan and the more scrutiny your application will get. So, keep in mind that it is easier to get smaller loans. Therefore, it might be a good idea to have an initial meeting with your banker to discuss the proper loan amount request to ensure that your request fits their requirements.
Collateral: Do you have some valuable property to use as security? For example, you might be asked to secure the loan with real estate, inventory or accounts receivable. Just remember that bankers love collateral. It makes their job easier and allows them to approve more loan requests.
Character: Finally, banks will consider the character and integrity of the borrower. For smaller, independent banks, this “C” is vitally important, whereas larger banks may consider credit scoring to be more important.
Today, the model for young bankers is the computer jockey who can engineer complex credit structures, or the hair-triggered trading desk operator who spots fleeting anomalies in relative asset prices. Reality has become the abstraction on the computer screen; gone is the face-to-face assessment of credit worthiness.
Bankers are correct that it is more efficient to process multi-billion dollar deals than to make loans of a few hundred thousand to a few million dollars.
Unfortunately, however, neither human nature nor the underlying reality of lending has changed. Bankers are still dealing, for example, with real estate lending, one of the primary sources of illiquidity that aggravated the 1929 stock market and banking crash that led to the Great Depression.
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