–Banks Can’t Grow Too Fast, Must Avoid Lending Concentrations
–Southeast Econ Continues to Rebound, Proxy for US Economy

By Heather Scott

WASHINGTON (MNI) – Banks and supervisors must heed the lessons of
the financial crisis and avoid errors such as growing too fast, relying
on wholesale funds, or concentrating lending in one sector, Atlanta
Federal Reserve Bank President Dennis Lockhart said Friday.

Lockhart summarized the lessons of the crisis this way:
“concentrations are deadly;” “speed kills;” “hot money can burn you;”
and “the entry bar needs to be raised” for new bank charters.

“As bankers and regulators, it’s our collective responsibility to
heed the lessons of recent experience and get it right going forward to
ensure a healthy, well-functioning banking system for our communities
and our nation,” Lockhart said in a speech prepared for delivery to the
Alabama Bankers Convention Annual Meeting.

Focusing most of his discussion on the challenges facing community
banks, the Fed official said many had “fatal concentrations” of loans in
real estate, especially construction, based on the argument that “there
are not a lot of other lending opportunities.”

Another mistake was in trying to grow too fast, which “can
overwhelm organizational capacity, resulting in deterioration of
discipline,” he said.

“In my view, it is very hard to grow at a pace much above the
general growth rate of the area’s economy without either assuming undue
concentrations or gaining share at the expense of competitors, typically
accomplished through relaxed standards. Share capture of loan assets too
often is a wolf in sheep’s clothing.”

Some banks aimed to grow aggressively because of a flawed,
over-optimistic business model with the intent to sell to a larger bank
in five or six years, he said.

“As regulators, we’ve learned we need to be more realistic in our
assessment of proposed business plans and less tolerant of deviations
from those plans,” Lockhart said. “I believe new bank charters have been
granted too liberally, and the entry bar needs to be raised.”

Rapid bank growth also brought dependence on wholesale funding,
what he called “hot money,” while “core deposits form a more stable base
on which to grow.”

Lockhart also reviewed the Southeast economy, which he said serves
as “an excellent economic proxy for the whole country.”

“In general, the Southeast’s economy continues to rebound. A
growing body of evidence suggests a sustainable recovery is under way,”
he said. “Regionally, that recovery is not yet well established.

“Retail merchants in the region continue to experience increased
traffic and sales, and their outlook has become more optimistic,” and
manufacturing and transportation continue to see a “steady rebound.”

But “challenging conditions persist” in commercial real estate, and
loan demand remains soft.

Lockhart said “stabilization of financial markets is a precondition
of a return to economic growth.”

** Market News International Washington Bureau: 202-371-2121 **

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