How will the profitability of commercial loans at banks be affected in the years to come?
The commercial loan market went through a lot in recent years. That it hit the bottom during the 2008 global economic recession and improved considerably over the past few years is a clear illustration of this very fact. However, there is a lot of uncertainty about what lies ahead for the players of this industry. Indeed on one hand, there are people who believe that the U.S. economic activity will decline after borrowing costs are increased. On the other, there are people who are much more optimistic about the economic performance in the near future. This article discusses how the profitability of commercial loans at banks will be affected in the years to come.
Trust and legal challenges
Much, if not all, of the blame for the 2007 financial crisis has been assessed on lenders. This has considerably damaged the trust that the public had in them. The percentage of people who view banks as a trusted organization is lower than what it was before the recession. Yet, it’s important to note that these trust issues are also felt in legal cases with judges progressively becoming more pro-borrower.
Commercial lenders are bending the rules
Competition has become so fierce in this sector that each player is trying to do whatever they believe will guarantee their survival. But the problem is that this is encouraging risk-taking behaviors. For example, there are many financial institutions that have been accused of softening their credit standards to attract new customers during the past months. While this strategy may prove to be successful in the short run, it has the ability to cause great economic damage in the long run. This is especially true if everybody starts doing the same thing.
The effect on profitability
Banks are clearly feeling the consequences of the latest economic recession on their profitability. That’s why they are trying to come up with ways to address some of the issues mentioned in this article. It will certainly take some time before things improve markedly in commercial lending activity, as financial regulators are monitoring the banking industry more than ever.
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Alan Lee
www.HurdleGroup.com
www.TheSchoolOfBanking.com