After a brief hiatus I had to get back and blog about my favorite subject...Banks. Yesterday the Federal Reserve released the results of their "Bank Stress Tests" or as they like to call it the Supervisory Capital Assessment Program (SCAP). This was not a test of whether the banks were solvent (they all pass that as conditions are today) it is a test of whether they had capital to absorb losses if conditions worsen. Only the top 19 bank holding companies, the so called "to big to fail" banks, were reviewed. These banks hold 2/3 of the assets and and half of the loans in the country. The test showed that if the economy worsened by the end of 2010 that the 19 banks could absorb losses of up to $599 billion. 10 of the banks reviewed were ordered to improve their capital position to increase their cushion against potential losses. Of local interest PNC (owner of National City Bank) was ordered to increase their capital position by $600 million, Fifth Third Bank by $1.1 billion and Key Bank by $1.8 billion. J.P. Morgan Chase was not required to increase their capital position. Here is an interactive graph from the Wall Street Journal that compares the various banks in the test. Note...smaller regional banks were not included in this test even if they accepted TARP funds from the government.
This is the first time the government has positioned certain banks as stronger than other banks. In the beginning of the TARP process there was no differentiation in getting funds other than the amount. This was partially so that banks that needed funds weren't at a marketing disadvantage to those that didn't need funds. In some cases banks were forced to take funds they didn't need (at least in their opinion). Now there is some differentiation between those needing to raise additional capital and those that don't need to raise capital.
The major challenge to small business right now is that credit is still very tight. The government is requiring additional capital now in case the economy continues to stumble into the future. This will cause banks to hold on to their cash. If banks are holding cash that means less money to lend, thus the credit crunch would continue. There is a serious lack of working capital available for small business due to increased bank underwriting standards. Companies that need new money are being stopped at the bank's doors and many companies are having their current lines of credit reduced or at least more closely scrutinized due to macroeconomic economic conditions. While there are some signs that the economy might be showing slight improvement there is still much uncertainty around. Many question whether the worst is over for the banks and feel that the commercial real estate market could be the next collapse. Consumers are still not spending like they have in the past due to concern over job security. Until the consumer starts spending the entire economic chain will continue to remain down.
Now more than ever it is critical that small businesses are strategic in their thinking and planning. Don't look out 12 months, look 5 years or more into the future. Customers and products may look very different than they do today. Know where the business needs to be and what will it take to get there. Small businesses need to do everything they can to foster innovation in their operations. It is important maintain, or grow, the intellectual capital in the business. It is this push toward business innovation that will allow the small business sector to survive and lead the economy out of recession.
