In a recent webinar a participant asked me two great questions: “Do you think lenders and banks have learned their lesson, and what important lessons can be taken from last year’s circumstances to remember for the rest of our business lives?”
First, this was not a banking crisis, but a shadow banking problem. For the most part, regulated banks on the lending side were not a majority of the problem. The crisis centered on investment banks involved in lending, particularly in housing and commercial real estate. The Glass-Steagall Act, passed during the aftermath of the Great Depression and repealed about 10 years ago, was designed to separate commercial and investment banking. Some politicians encouraged regulators to relax lending standards, particularly in housing. This, along with red hot real estate markets in “God’s waiting room,” i.e. Florida, Arizona, Nevada and California, led to lending run amok. Many loans were tranched and sold off throughout the world.
The lesson learned from this situation is not to relax loan underwriting standards in good times. That is what lenders do in tough times.
Cash flow and profits repay loans and financial liquidity is the fallback. Loans should not be made on collateral only. I hope those in the grain business and in strong ag real estate markets listen to this point.
Lenders must know their customers, and particularly, ag customers must know their lender.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at email@example.com.