• WisBusiness

DFI secretary: Financial sector may lag in recovery
6/29/2009

By Brian E. Clark
For WisBusiness.com

The state’s unemployment rate may have dropped a tad last month – falling from 8.8 percent in April to 8.7 percent in May. And there are other flickers of an economic rebound, including a rebound in the stock market.

But many of the state’s banks and credit unions are still laboring under losses from real estate and commercial loans and may take longer to emerge from the current recession than other sectors of the economy.

That’s the assessment of Lorrie Keating Heinemann, secretary of the Wisconsin Department of Financial Institutions.

“We are not out of the woods yet,” Heinemann said in a late June interview with WisBusiness.com.

“The financial institutions’ profit margins have been hit or eliminated in some cases,” she said, noting that many banks and credit unions in the state have increased their loan-loss reserves.

“So we don’t see the financial industry out of this recession yet," she said. "But I think that moving forward people are being much more diligent in the underwriting and hopefully the majority of our banks will be able to pull out of this just fine.”

Heinemann brushed off a recent decision by Standard & Poor’s to cut the credit ratings of 22 regional bank-holding companies, including Associated Banc-Corp.

“We don’t comment on the S&P’s data,” she said. “Certainly they have their own system. But we work with the FDIC (Federal Deposit Insurance Corp.) We use the FDIC’s financial data.”

But she acknowledged that Wisconsin’s banks “certainly continue to be challenged by the effects of this recession. There is certainly no doubt about that.

“The unemployment rate and the depressed real estate market are what are affecting our delinquency ratios. Our delinquency ratios are the highest they have been in 10 years.”

She said banks now have a “passed-due” ratio of about 5.85 percent for their total loan volume.

For consumers, many of whom have seen a decline in the value of their homes, that means lending institutions are being tougher on loan requests.

“What this calculates into is that banks are going to be very diligent on their underwriting process,” she said.

“For example in real estate loans, they ensure that there is employment history there and that there is a certain credit rating in order to obtain that loan so that it will be paid back.

“And for businesses, it means the same thing. There are very strict underwriting standards that are adhered to by Wisconsin banks.”

Though Wisconsin hasn't had any bank failures, Anchor Bank and Guaranty Bank have suffered losses that caused them to close offices and lay off employees.

“We have many banks in Wisconsin that are continuing to experience problems, primarily in their real estate and commercial loans, many times from factors that are beyond their own control.

“However, for the great majority of community banks in the state – and we have a couple hundred of them – we know that they are weathering the storm. But some have been hit harder than others due to underwriting in the commercial market.”

With the federal government poised to increase regulation on financial institutions, Heinemann said she's waiting to see the details. But she said the generally supports the general outlines of the plan.

She said the current proposal would protect the country’s “dual banking” system, which allows banks to be chartered and regulated by either the states or the federal government.

“The dual banking system is extremely important for the ability of our legislators to make laws that impact how banks to operate in our state and for consumers to be protected within our state,” she said.

She said the plan would maintain the rights of states “and actually gives them additional powers, particularly in consumer protection” with a new consumer financial protection agency.

But she said Wisconsin already has one of the country’s strongest consumer acts.

“At this point – and the detail isn’t out there – we feel that the dual banking system will remain in place,” she said. “That provides the benefit of our legislators who are closest to the consumers to respond and make laws that are beneficial to consumers in the state.”

For consumers, Heinemann said it's almost always a good idea to deal with a local lender.

“It is extremely important to deal with someone who you can look across a desk at your local bank or credit union and make sure that you understand the financial product you are taking, whether it is a loan or an investment,” she said.

“You need to make sure you can maintain that relationship because they have a vested interest in maintaining your financial well-being going into the future,” she added.
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