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SMEs Still Starved for Credit

Greenwich Associates highly regarded Market Pulse Study on SME credit availability reports that two-thirds of small businesses and 55% of middle market companies indicate that banks are failing to meet the needs of creditworthy companies.  Half of the 221 small businesses participating in the latest Greenwich Market Pulse Study say it is harder to secure credit today than it was at this time last year including roughly 33% of businesses that say it is much harder to obtain loans today.

The Small Business Lending Fund (SBLF) a $30 billion program established by the Treasury Department to encourage Community Banks to step up lending to SMEs is still trying to get some traction in the marketplace.  The SBLF injects capital into community banks that demonstrate an active SME lending  program will take another quarter to determine its effectiveness.

Community Banks are still transitioning its small business lending focus from an over dependency on real estate development.  SMEs seeking loans for capital improvements, fund operations or business expansion must provide lenders some added assurances about the financial health of the business.

SMEs can take steps to improve their credit standing and get approvals from lenders for loans and expansion for credit.  SMEs must demonstrate they have an excellent understanding of the condition of their firm’s financial health, what they must do to improve profitability and how they will use the credit extended by lenders to produce an acceptable return.

Credit Redi helps SME’s demonstrate the condition of the firms financial health, the risks and opportunities that SMEs must address to improve the firms financial health and identify the initiatives that need to be  funded to achieve desired profitability and growth.  These are the keys bankers look for on applications for loans.  Being able to demonstrate credit worthiness with an industry standard rating methodology determines weather a lender will grant you a loan, what rates you will pay and how much lending institutions will lend.

Since 2002, Sum2 has been helping SME’s manage risk and seize opportunities to grow and prosper under the most competitive market conditions.  Credit Redit is the latest addition to Sum2’s series of SME risk management products.

To determine the condition of your company’s financial health click here: 

Risk: credit, SME, capital allocation, credit rating

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January 13, 2011 Posted by | banking, credit, Credit Redi, government, risk management, Small Business Lending Fund, Sum2, Treasury | , , , , , , , , , , | Leave a comment

Banking is Getting Expensive

screamThe severity of the banking crisis is evident in the 95 banks the FDIC has closed during 2009.  The inordinate amount of bank failures has placed a significant strain on the FDIC insurance fund.  The FDIC insurance fund protects bank customers from losing their deposits when the FDIC closes an insolvent bank.

The depletion of the FDIC Insurance fund is accelerating at an alarming rate.  At the close of the first quarter, the FDIC bank rescue fund had a balance of $13 billion.    Since that time three major bank failures, BankUnited Financial Corp, Colonial BancGroup and Guaranty Financial Group depleted the fund by almost $11 billion.   In addition to these three large failures over 50 banks have been closed during the past six months.   Total assets in the fund are at its lowest level since the close of the S&L Crisis in 1992.   Bank analysts research suggests that FDIC may require $100 billion from the insurance fund to cover the expense of an additional 150 to 200 bank failures they estimate will occur through 2013.  This will require massive capital infusions into the FDIC insurance fund.  The FDIC’s goal of maintaining confidence in functioning credit markets and a sound banking system may yet face its sternest test.

FDIC Chairwoman  Sheila Bair is considering a number of options to recapitalize the fund.  The US Treasury has a $100 billion line of credit available to the fund.    Ms. Bair is also considering a special assessment on bank capital and may ask banks to prepay FDIC premiums through 2012.  The prepay option would raise about $45 billion.  The FDIC is also exploring capital infusions from foreign banking institutions, Sovereign Wealth Funds and traditional private equity channels.

Requiring banks to prepay its FDIC insurance premiums will drain economic capital from the industry.  The removal of $45 billion dollars may not seem like a large amount but it is a considerable amount of capital that banks will need to withdraw from the credit markets with the prepay option.  Think of the impact a targeted lending program of $45 billion to SME’s could achieve to incubate and restore economic growth.  Sum2 advocates the establishment of an SME Development Bank to encourage capital formation for SMEs to achieve economic growth.

Adding stress to the industry, banks remain obligated to repay TARP funds they received when the program was enacted last year.  To date only a fraction of TARP funds have been repaid.  Banks also remain under enormous pressure to curtail overdraft, late payment fees and reduce usurious credit card interest rates.  All these factors will place added pressures on banks financial performance.  Though historic low interest rates and cost of capital will help to buttress bank profitability, high write offs for bad debt, lower fee income and decreased loan origination will test the patience of bank shareholders.   Management will surely respond with a new pallet of transaction and penalty fees to maintain a positive P&L  statement.  Its like a double taxation for citizens.  Consumers saddled with additional tax liabilities to maintain a solvent banking system will also incur higher fees by their banks so they can repay the loans extended by the US Treasury to assure a well functioning financial system for the republic’s citizenry.

Risk: bank failures, regulatory, profitability, political, recession, economic recovery, SME

September 29, 2009 Posted by | banking, commerce, compliance, credit crisis, economics, FDIC, government, regulatory, risk management, SME, sovereign wealth funds, TARP, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments

Get Ready for New Treasury Small Business Lending Program

economic_recoveryReuters reports that the U.S. Treasury will soon launch a new program aimed at aiding small business lending, the head of the Treasury’s $700 billion bailout fund said on Thursday.

Herbert Allison, the Treasury’s assistant secretary for financial stability, declined to provide details or specific timing on the program in testimony before the U.S. Senate Banking Committee.

The US Treasury has focused for the past year on stabilizing the banks with massive capital infusions into the sector with the TARP program.  The TARP seems to have succeeded in its goal to shore up the economic capital base of bank’s but lending activity to small and mid-size enterprises (SME)  has dramatically slowed.  Capital constraints and heightened risk aversion by commercial banks has curtailed access to moderately priced credit products for many SMEs.  Credit risk aversion and the recession has hurt the sector and has contributed to growing bankruptcy rates by capital starved SMEs.

SMEs employ more workers then any other business sector demographic.  One of the reasons the recession has been so severe is due to the massive layoffs and business closures within the by SME segment.   There are approximately 6 million SMEs in the United States.  If each SME hired one person that would put a serious dent in the unemployment rate.  Some statistics on the SME demographic includes:

• Represent 99.7 percent of all employer firms.
• Employ half of all private sector employees.
• Pay more than 45 percent of total U.S. private payroll.
• Have generated 60 to 80 percent of net new jobs annually over the last decade.
• Create more than 50 percent of non-farm private gross domestic product (GDP).
• Supplied more than 23 percent of the total value of federal prime contracts in FY 2005.
• Produce 13 to 14 times more patents per employee than large patenting firms.
• Are employers of 41 percent of high tech workers (such as scientists, engineers, and computer workers).
• Are 53 percent home-based and 3 percent franchises.
• Made up 97 percent of all identified exporters and produced 28.6 percent of the known export value in FY 2004.

(Source: Cornell School of Industrial and Labor Relations, Basesky and Sweeney)

The US Treasury program will target the SME segment and direct capital to help lead the economic recovery.  SMEs are the leading source of job creation, product innovation and wealth creation.  A vibrant and financially healthy  SME sector is key to any sustainable economic recovery.  This program will also help to bolster the ailing community banking sector that has seen over 95 closures by the FDIC this year.

It is critical that SMEs prepare to participate in this program.    Sum2 offers a complete product suite to help SMEs capitalize on the many opportunities economic recovery will present.  Sum2’s recently announced webinar series “Recovery Tools for a New Economy” offers SME critical management tools to profit from the emerging business cycle.

As the lending program to SME rolls out, bankers will initiate engagement process and business reviews.  They will be  looking to determine if SME managers have identified risks confronting their business.  It is incumbent on small business managers to understand how changing market dynamics and operational risk factors are impacting their business and demonstrate how they will mitigate these risk factors.

Sum2 provides a series of risk assessment products that assist companies to chart paths to profitability and growth.  The Profit|Optimizer, is a unique risk management and opportunity discovery tool that helps SMEs effectively manage the challenges posed by the recession and recovery business cycles.

Risk:  SME, recession, recovery, stimulus, commercial banking

September 25, 2009 Posted by | banking, credit, FDIC, recession, risk management, TARP, Uncategorized, unemployment | , , , , , , , , , , , , , , , , , , , , , | 3 Comments

The Tax Man Cometh

taxmanThe IRS has reached agreement with UBS over disclosure of the identity of US citizens holding private bank accounts with the firm in Switzerland.  The agreement calls for UBS to release the names of 4,450 clients who are suspected of using the bank to hide assets and avoid taxation.   UBS has private banking relationships with with over 52,000 US citizens with assets approximating $15 billion.

Private banking is an important pillar of the Suisse economy.  This action may pose a significant threat to the Suisee banking industry.   Compliance with the IRS request for the names of private bank account holders  damages the venerated wall of secrecy Suisse banks employ to attract assets and clientele.  Other EU banking centers like Luxembourg and Liechtenstein may also feel pressure to comply with news standards of transparency and disclosure.  This may have the effect of driving investors to seek more exotic havens to park assets.  Offshore domiciles in the  Indian Ocean, Southeast Asia and Latin America may benefit from this action.  It may also add to the risk of investors seeking safe havens for their assets.

For US taxpayers, the resolution signifies that the IRS is serious about its intention to ramp up enforcement of the tax code.  The IRS has enhanced its focus on US citizens and corporations utilizing foreign banks and offshore investment vehicles.  The agency is concerned that investment products and financial services offered by foreign banks have enabled US citizens and corporations to avoid tax liabilities.  Products such as credit cards, hedge funds and other investment partnerships are coming under the exacting microscope of the IRS.

The IRS is under pressure to enforce compliance with federal tax statutes.  The US Treasury coffers are seriously depleted given all the stimulus and economic recovery expenditures.  The IRS is mandated to assure that compliance is adhered to so taxpayers pay taxes on all legal capital gains and income.  As this blog reported, the IRS has developed an Industry Focus Issue, (IFI) audit strategy that  profiles investment partnerships and other corporations that use offshore domiciles to harbor assets.  IFI guides field audit personnel through a risk based assessment of investment partnerships.  The IFI aggregates and ranks  Three Tiers of high risk tax compliance issues.  Examiners will conduct rigorous reviews of these issue sensitive factors.  Many of the factors concern the recognition of income and assets in custody outside of the US and repatriation of revenue derived in foreign domiciles.

Sum2 has published a product, IRS Audit Risk Program (IARP) that guides corporate tax managers and tax professionals through a risk assessment of their exposure to IFI risk factors.  The IARP is a strategic tool that corporate tax professionals utilize to score risk exposures, determine mitigation actions, estimate remediation expenses and manage tax controversy defense strategies.  The IARP is available for purchase on Amazon.com.

The IRS action against UBS is the opening salvo in the new era of enhanced compliance.  UBS is a marquee brand that indicates that the IRS is serious about compliance. As a result of the UBS settlement other Suisse banks are coming forward to make voluntary disclosures about US citizens suspected of tax-evasion.  Those bank  include, Credit Suisse, Julius Baer Holding, Zurcher Kantonalbank and Union Bancaire Privee.  UBS has  previously turned over approximately 250 names to the IRS.  It is believed that the IRS has issued indictments to 150 people from that list of names.

This high profiled action against UBS has helped to publicize the IRS amnesty program that expires September 23rd.  In an effort to encourage Americans to voluntarily disclose information about  accounts they illegally withheld, the IRS created an amnesty program. Under the amnesty program, any taxpayer who successfully completes the requirements will not be criminally prosecuted for their acts.  More details on the IRS amnesty program can be found here on the FIND LAW website.

Risk: tax, reputation, compliance,


August 21, 2009 Posted by | compliance, CTA, hedge funds, IARP, IRS, regulatory, reputational risk, Tax, Uncategorized | , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

$700 Billion is a lot of Guacamole!

paulsonAn article in today’s  Forbes online entitled Trouble with TARP,  reports a growing concern by the Congressional Oversight Panel (COP) about the effectiveness of the $700 billion program.  The COP reports that the effectiveness of the program is difficult to determine due to lack of transparency of how funds were spent.  The COP report also states that the absence of any reporting guidelines for TARP participants impedes effective oversight.

The 145 page report starts with a retelling of the extreme conditions confronting the banking sector as the credit crisis exploded last autumn.  It also outlines the choices confronting regulators, legislators and industry executives as the crisis deepened.  We were led to believe by Treasury and Federal Reserve officials that the global banking system was in imminent  danger of collapse.  Nothing less then immediate and drastic measures taken by sovereign government officials and industry executives would prevent the catastrophic consequences of global economic carnage.  The report makes it clear that these market conditions were so extreme that regulators were navigating through uncharted waters.  Any remediation measures taken had little historical precedence to guide actions.  Hence Paulson was given carte blanche to handle the crisis with unprecedented latitude and executive facility.

As this blog reported earlier this week, the TARP was originally designed to acquire troubled assets from banking institutions.  TARP funds were earmarked to purchase mortgage backed securities and other derivatives whose distressed valuations severely eroded capital ratios and stressed banks balance sheets.  Hank Paulson later shifted the strategy and decided to inject TARP funds into the banks equity base.  This has done wonders for the shareholders of the banks but troubled assets remain on the banks balance sheet.  As the recession continues,  unemployment, home foreclosures, SME bankruptcies and the looming problem with commercial mortgage backed securities  (CMBS) are placing a new round of added strain on the banking system.

The TALF program is designed to draw private money into partnership with the government to acquire troubled assets from banks.  So far the program has received a tepid response.  I suspect that the principal factors inhibiting the expansion of the TALF program are numerous.  Chief among them is the inability of FASB to decide upon valuation guidelines of Level III Assets.  Banks holding distressed securities may also be reluctant to part with these assets because they have tremendous upside potential as the economy improves.

The COP also questioned the effectiveness of TARP because stress tests were only conducted on 19 banks.  The report states that additional  stress tests may be required because the previous tests failed to account for the length and depth and length of the recession.   Community banks are also of concern.  They face a perfect storm in challenging macroeconomic conditions.  Of particular concern is commercial real estate loans.  Many economists are concerned that high rate of loan defaults in commercial loan portfolios pose great threats to the community banking sector.

Though interest rates remain low due to the actions of the Federal Reserve,  lending by banks still remains weak.  SME’s are capital starved and bankruptcy rates are quickly rising.  SME’s are critical to any economic recovery scenario.  A strong SME sector is also crucial for a vibrant and profitable banking system.  Perhaps a second round of TARP funding may be required to get more credit flowing to SME’s.  If banks start failing again it would be devastating.  The Treasury and the Federal Reserve don’t have many bullets left to fire  because of all the previous expenditures and a waning political will of the people to continue to fund a systemically damaged banking system.

Risk: banks, SME, economy, credit, market

You Tube Video Music: Billie Holiday with Lester Young, Pennies from Heaven

August 13, 2009 Posted by | banking, credit crisis, economics, FASB, Paulson, real estate, recession, regulatory, SME, TALF, TARP, Treasury, Uncategorized, unemployment | , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Conference Call with Hank

National Federation of Independent Business (NFIB) members had an opportunity to participate in a conference call with Secretary of the Treasury Henry Paulson. Mr. Paulson was keen to solicit the support of NFIB members for the passage of the Emergency Economic Stabilization Act, (EESA).

NFIB members are small business owners who are generally very conservative, free market advocates who vigorously support tax relief, oppose regulatory oversight and large governmental spending programs. NFIB member firms are the entrepreneurs, shopkeepers, service providers and small business risk takers who populate the small stores and office space on Main Street USA.

Small business owners are a politically vocal and influential constituency whose support proponents need to gain passage of EESA. Last night EESA passed the Senate. It will now return to the House of Representatives for a vote. Secretary Paulson asked NFIB members to contact congressmen, senators and media to urge support of EESA passage.

Key points raised were as follows:

FDIC deposit insurance limit was raised to $250,000

EESA Bill included riders with tax cuts and other rebate incentives

EESA has a recoupment provision “put” that allows Treasury to sell assets back to banks at a previously agreed upon price

Failure of EESA will curtail community bank lending activity to small businesses

Large businesses and municipalities dependent on credit markets for short term funding will scale back purchases with small businesses

Current Treasury tools are not sufficient to deal with problem

EESA funding (Federal Budget program cuts) will need to be addressed in next budget cycle

Regulatory frameworks of financial services industry need to be streamlined, strengthened and reformed

Mark to Market of toxic bank assets will help to temporarily address bank solvency and capitalization ratios

Music Video: Blondie, Hangin on the Telephone

Risk: bank solvency, credit, interest rates, recession

October 2, 2008 Posted by | credit crisis, EESA, Paulson, TARP, Treasury | , , , , , , | Leave a comment