Global Banking Crisis and Commercial Lending | Financial Crossing

Who would have thought that the greed, excesses, and well intentions of Wall Street would have led to a total disintegration of global confidence in the very bedrock upon which our international connectivity exists?

The man on the street is scared. He is terrified that the job he left Friday afternoon will not be there on Monday morning. He fears that the rising cost of food, fuel, and shelter will continue to consume him and his credit cards in one fell swoop.

The woman in the boardroom is also trembling at the thought of her economic lifeline being cut. Where will she get the short term funds that she needs to cover next weeks payroll? How will she cover the costs of the raw material order she just placed with her supplier in China? Where is all the equity in her plant and machinery that was so prevalent just 12 months ago, and can she continue to operate this business from the meager savings she has squirreled away over the previous five years?

Everywhere you turn, the connectivity to the global banking system is becoming more clear. The financial crisis being discussed on Capital Hill and Wall Street is starting to become a reality to Main Streets across this and many countries worldwide. A global debt economy is only as efficient as the rules which govern it. As we are getting a glimpse of, the rules which governed our system were lax. They were lax for a number of reasons, but the underlying theme is no doubt greed. A system which rewards with spoils beyond gluttonous imagine can only survive for so long before it devours itself.

This is the point we are at. The system of buying, selling, and insuring debt instruments became extraordinarily complex when institutions began splitting these instruments into pieces and packaging them with other pieces of debt which shared seemingly similar characteristics (tranches). To make the transactions even more complicated, the seller would insure the tranche (to protect the balance of the debt instrument he was left holding), and the buyer would insure the tranche against losses which may be realized down the road. Since there was ?insurance? involved in the selling and buying, multiple parties were able to hold the same debt instrument on their books as an asset. When the debt instrument failed through a default by the borrower or an action of the market (in terms of credit default spreads and credit swaps), the insurers were unable to cover the losses. This inability of insurers to cover the magnitude of losses created by a slumping real estate market has created a domino effect which now threatens the stability of our financial markets.

Rather than relying on insurance to cover losses, banks must rely on capital reserves. As their capital reserve requirements increase in response to a rising default rate on the money they have lent out to the business owner, the homeowner, the automobile purchaser, the credit card user, the amount of money available to finance new lending becomes strained. Banks therefore tighten their lending policies to protect the instituion from failure. You can probably tell from the headlines that some have been more successful than other at this, lately.

Despite long standing banking relationships with its valued customers, banks around the globe are becoming miserly when it comes to parting with their cash supplies. The banking regulations which still exist and are being enforced, require banks to hold a certain level of cash or its equivalent on hand as a reserve against losses, as such, new loans can only be written when old ones are paid down.

When you finally find a bank willing to lend you money, be prepared to pay higher interest rates. Loan terms will also begin to contract. For most commercial borrower?s, this means terms of 3 to 5 years versus the 10 to 15 year loans which were commonplace just last year. Forget about borrowing at competitive rates for speculative development projects these days, as only near stabilized projects with only the best credit quality tenants will even be considered by most mainstream lenders.

There are always those willing to lend you money in tough economic times, most however will charge you extraordinarily high interest rates with several points, offer loan to value ratios of 50 percent or less, and have some extremely restrictive loan covenants in the deal. These are loans for desperate borrowers and should be scrutinized thoroughly before being considered by anyone.

Global Banking Crisis and Commercial Lending

Source: http://www.financialcrossing.com/global-banking-crisis-and-commercial-lending/

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