Gov. Mark Dayton's decision to deposit another $100 million in Minnesota's community banks is a sincere but ultimately symbolic gesture that will do little to spur new small business lending in the state.
Most of Minnesota's community banks don't lack the money to make loans. They lack the stomach. State investments in their certificates of deposit won't strengthen that intestinal fortitude.
It's a universally acknowledged truth that entrepreneurs always complain that bankers and investors are either too tightfisted or too stupid to recognize the brilliance of the opportunity before them. When 10 bankers say, "No," the problem is never the business plan. It's the bankers.
In reality, banks like to make loans, especially ones with a high probability of being repaid. That's how they make money. Sure, loan rates may be near historic lows, but the interest rates that banks have to pay depositors are even lower. The spread between the two will do more for a bank's bottom line than parking cash in Treasury bills.
Banks also are in much better financial condition to make loans now that the dark days of the 2008 financial crisis are receding into the horizon. Fewer vultures are congregating atop the time-and-temperature signs outside their branches, and the Friday evening seizures by federal regulators have become less frequent.
Assets, including customer deposits, are up at many banks, but loan volume remains weak. At state regulated banks (a group that excludes nationally chartered banks like Wells Fargo and U.S. Bank) loan volume has fallen about 1 percent during the past four quarters, according to data compiled by the Federal Reserve Bank of Minneapolis.
Why? One lending sector, commercial real estate, remains moribund and, given the calamity in that sector in recent years, virtually off limits.
Banks also have tightened their lending standards, either independently or at the prodding of regulators. Consequently, businesses that used to be considered creditworthy now find themselves on the outs.
