The big picture on banking just got clearer. We need to look at it closely, then step back and see what it means for Indian country.
Bringing the big picture into focus is the Office of the Comptroller of the Currency's annual snapshot of bank lending practices, released Sept. 20. It tells us bankers responded to earnings pressure from investors by doubling the dollars they have out in risky loans. The higher-risk loans come with a higher interest rate than most other loans, which means banks can show higher earnings to Wall Street, at least for the short term.
To make these more risky loans, banks must lower ordinary lending standards - "relaxed underwriting" is the term - to attract more potential borrowers. Since most safe loans have been made in the steamroller of a mainstream economy, banks must expand the market for risky loans to keep earnings on a growth curve and keep Wall Street happy.
But a higher percentage of these loans become troubled loans, a trend that takes a year or so to show up. Right now, at a time when the mainstream U.S. economy revels in prosperity, the troubled business loans total soared to $100 billion.
This earned banks stern warnings from regulatory agencies whose disapproval centers on business loans to overly leveraged companies. The key is "disapproval." When regulatory agencies that hold bank charters - a bank's authorization to exist - register a strong disapproval of banking practices, those practices change.
We saw it in Indian country when the Federal Reserve found a Montana bank was not properly addressing credit needs of the Northern Cheyenne. The OCC followed suit in Arizona, the Justice Department in South Dakota and (on a referral from the OCC) in Nebraska.
Eventually the attention of the entire banking industry turned. Almost nine years later to the day, no one would imagine the banking and financial service needs of Indian country have been met, but a banking presence has been established, more extensive than those of us at work on that goal years ago dared to hope.
This presence includes a branch of the very bank the Northern Cheyenne Native Action first challenged with the Fed. After a decade of mutual learning processes and growing cooperation, First Interstate BancSystem opened a branch on the Northern Cheyenne reservation last summer.
The noted improvement for banking in Indian country won't proceed unless tribes and tribal communities achieve a creditworthy relationship with modern financial channels and only with a big assist from financial literacy training, credit repair and local financial intermediary organizations.
Though the very large business loan to overly leveraged clients is the first concern of the current OCC survey of lending quality, home and home-equity loans also test positive for relaxed underwriting standards and also get negative reviews.
The ultimate fear of the OCC is that if the economy deteriorates, banks will not be able to recover losses on risky loans in the commercial sector from their standby in hard times past, consumer loans. Consumers also are overextended as indicated by the high percentage of consumer debt held in mortgage instruments such as home loans and home equity loans.
Recent loan default trends suggest such mortgage debt means many consumers tapped out their traditional emergency credit line - the home. If the economy were to falter, loan losses would cascade from banks through the commercial sector, into consumer borrowing and finally into the home.
For Indian country this means lending standards will become more stringent. After being skewered on all sides for failing to flag down the Savings & Loan crisis of the 1980s, the regulatory agencies will not sit on their hands while the banking system expands the frontier of credit risk. A memo from Comptroller John D. Hawke Jr., plainly stating as much, accompanied the OCC loan quality survey report.
Despite outstanding progress in the past 10 years, many Indian people remain on the high-risk side of credit standards. Even tribally owned banks experience trouble making loans to Indian people. For some of the reasons cited, regulatory agencies won't take "relaxed underwriting" far enough to reach many Native Americans with a chancy credit history or none at all.
To continue the progress, Native communities must rely on financial literacy training, credit repair and local financial intermediaries. Banks are essential to Native communities and we must continue to expand their presence, but they cannot do it all.
Local financial intermediary organizations such as the Lakota Fund on the Pine Ridge reservation, Sicangu Enterprise Center on nearby Rosebud, the First Nations Oweesta Corp., various Individual Development Account programs, housing councils, Hopi Credit Association and the similarly modeled Emergence initiative of Charley Wagner, the several credit unions across Indian country, the Tribal Business Assistance Centers of various tribal colleges - also are regulated in one way or another.
But, as non-profits, they do not face earnings pressure from short-term investors and thus make it their mission to build the financial literacy of tribal members, provide technical assistance in the loan application and home ownership processes, repair personal credit histories and extend loans, and where possible graduate people to full-fledged depository relationships with banks.
Comprehensive programs to enhance the personal financial knowledge and skills of tribal members are also of the first importance to our financial future. The great feature of such programs is that they travel well.
If there is no immediately available financial intermediary, IDA program, credit union, credit association or bank, look for the Fannie Mae Foundation "Financial Skills for Families" curriculum, which will be getting out to Indian country this coming winter.
In the spirit of full disclosure it should be noted that "Financial Skills for Families" initiative is a partnership between Fannie Mae Foundation and First Nations Development Institute. In many ways it can be a compressed form of mentoring.
In any case, it is clear enough from the big picture that Indian country cannot fully capitalize on economic gains of the past decade without bringing to critical mass the financial skills and knowledge our communities possess. Bank on it.